Last year was tough for many small biz owners: How to manage accumulated business debt

How can I get rid of all of this business debt I accumulated this past year?

Today, I will put on my hat as an ex-bankruptcy lawyer to answer this question.

To quote Al Pacino in Godfather III: “Just when I thought I was out, they pull me back in!”

Essentially you have four options:

1. Cut a deal with the creditor

Of course, you would like to pay your creditors in , but sometimes that is not possible. Rather than just walk away the debt then, it is usually best to try and work out some sort of payment arrangement with the creditor. Maybe they can give you more time to pay, or lower your payments, or even cut the principle.

You don’t know until you ask, and especially if you are in your payments, you may find the creditor is far more amenable to a negotiated settlement than you may realize – especially after the year we have all just had.

2. Cut a deal with the collection agency

If the debt is so overdue that it has been sold to a collection agency, you actually are in better shape vis-à-vis a settlement. Why? Because the collection agency bought the debt at a steep discount, maybe 10 or 20 cents on the dollar. As such, anything over that amount is profit.

As I said, that is good news for you insofar as negotiating a deal, but yes, bad news for your credit rating (that’s a different column.)

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What you can do is call up the collection agency and look to strike a bargain. Offer them, say, 40 cents on the dollar for the debt. They may say no, tell you you are crazy, whatever. But if you can get together a lump sum payment of, say, 50% of the total or so, and offer that, you just may find they are very willing to listen to that offer.

The key is to have a lump sum payment ready and be willing to suffer the consequences on your credit rating.

If they do agree to terms, make sure that you get all relevant terms in writing, especially that they will agree to consider the debt paid in full and will report it to the credit agencies as such.

Couple anguishes over bills. (Photo: skynesher / Getty Images)

3. File bankruptcy

Yes, I understand that no one wants to file bankruptcy, but that is life in the big city sometimes. What I also know is that I never got a “thank-you” note from a litigation client, but I received many from bankruptcy clients because the BK made their life easier.

Depending upon your goals, situation, and your desired outcome, you could file a Chapter 7, 11, or 13 bankruptcy.

  • Chapter 7 is the most common type of bankruptcy and wipes out most debt, but is also called a “liquidation” for a reason – you will likely have to close the doors to your shop and the bankruptcy trustee will liquidate your assets to pay your creditors at least something.
  • Chapter 13 is the second most common type of BK. It is essentially a reorganization plan for an individual or small business, allowing 3-5 years to repay certain debt.
  • Chapter 11 is a reorganization for a larger corporation.

The good news about an 11 and 13 is that you get to keep the business open.

4. Walk away

Again, depending upon your situation, this just might be the easiest solution. If you have few assets, most creditors won’t waste their time and money suing an “empty pocket.”

No matter which choice from the above, the answer is yes, you can get out of debt, but just know that it will take you a few years to get a decent credit rating again.

Steve Strauss is an attorney, speaker and the author of 17 books, including “The Small Business Bible.” You can learn more about Steve at MrAllBiz.com, get more tips at his site TheSelfEmployed and connect with him on Twitter @SteveStrauss and on Facebook at TheSelfEmployed.

The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.

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