Q: From reading your columns, I see that you used to be a bankruptcy attorney. For various reasons, my business has accumulated a lot of debt. But the thing is, I don’t want to file bankruptcy. Any other suggestions?
A: Too much debt can definitely make life and business very difficult. But you will notice I said, “too much debt.” I say that because one thing I also know is that not all debt is bad debt. If you took on some debt to fund a profitable expansion, for instance, that is good debt. If, on the other hand, that expansion went south and you charged a week-long trip to Hawaii, that, needless to say, is bad debt.
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So, what do you do when you have too much bad debt? Essentially, you have four options:
1. Cut a deal with the creditor
Of course you would like to pay your creditors in full, but sometimes, that is not possible. Rather than just walk away from 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 behind in your payments, you may find the creditor is far more amenable to a negotiated settlement than you may realize.
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 centson the dollar. As such, anything over that amount is profit. Like I said, that is good news for you insofar as negotiating a deal, but bad news for your credit rating (that’s a different column.)
So what you can do is call up the collection agency and look to strike a bargain.
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Offer them, say, 40 cents on the dollar. They may say no, tell 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.
But as I said, the key is to 1) have a lump sum payment ready, and 2) 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.
3. File for bankruptcy
True, no one wants to file bankruptcy papers, but I would be remiss if I did not go over this option.
Depending upon your goals and your desired outcome, you could file a Chapter 7, 11, or 13 bankruptcy. A Chapter 7 wipes out most debt, but is also called a “liquidation” for a reason:you may have to close the doors to your shop and the bankruptcy trustee would then liquidate your assets to pay your creditors at least something. A chapter 11 or 13 is a type of reorganizations whereby you repay some of what you owe over time, but get to keep the doors open. Speak to your lawyer to see which may be best for you.
Let me also note however that the only time I ever received thank-you notes when I practiced law was from former bankruptcy clients. Why? Because the relief from getting out of debt is that tangible.
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4. Walk away
Again, depending upon your situation, this just might be the easiest. If you have few assets, most creditors won’t waste their time and money suing an “empty pocket.”
No matter which choice you choose, it will definitely take you a few years to get a decent credit rating again, but in reality, that is just the cost of doing business sometimes.
