Negotiating Debt Settlements When You Go Out of Business

Negotiating debt settlements with creditors can be tricky. Below, our experienced business debt relief lawyers provide a few tips when dealing with business debt. 

Negotiating Debt Settlements With Equipment Lessors

You should make arrangements to return leased equipment. However, if you return the equipment before the lease is up, it is likely that you may be liable for either the remainder of the payments in the lease term or for an early return penalty. It is wise to negotiate a better deal while you still have the equipment. For instance, you may offer to return the forklift to the leasing company along with two months additional payments in exchange for a complete release of further obligations under the debt. If there is a lot of money involved and at stake, and the lessor is uncooperative, having a lawyer call, possibly with the suggestion that you may file for bankruptcy may be of great assistance. It is unlikely that any lessor will want to deal with bankruptcy court, and the fact that their property may deteriorate in the meantime.

Negotiating Debt Settlements With Secured Creditors

Prior to surrendering any property to a secured creditor, attempt to negotiate with the creditor to release you from owing a deficiency (the difference between what you paid the creditor and what you owned on the lease or contract). In the event that you are unable to negotiate a release, and you owe the creditor money, the deficiency is now like any other unsecured debt, meaning it is no longer secured because you returned the collateral.

Negotiating Debt Settlements With Unsecured Creditors

After you have communicated to your unsecured creditors that you are going out of business, they will start to call you to demand that they be paid. In most circumstances, it is advisable to explain to them that you are preparing as fair a settlement offer and you possibly can, and that you will be in touch with them. Take all the time you requires to be sure of how much you owe and how much cash you have to divide among your creditors.Once you have collected outstanding A/R and sold off inventory and equipment, you should have at least a small amount of cash to use to discuss settlements.

You may explain your terms personally or by phone if you just have a few creditors. Inform your creditors that you business does not have enough funds to pay them in full but that you can offer a partial payment to settle the debt. It will be great if the creditor accepts, and in these circumstances you should get each creditor that has accepted to sign a release for the entire amount in exchange for your partial payment, and then you’re done. The release is of vital importance, as without it, you have no proof that the debt has been satisfied. In these circumstances, creditors may sue you or the business for the remainder of the debt, which may be expensive and time-consuming to defend, even if you end up not being liable for the debt.

In the event that creditors wish to negotiate for substantially more or are threateningly uncooperative, it may be wise to contact a lawyer. Creditors will then know that you are serious, as a lawyer will be able to convincingly make the creditors aware that you may file for bankruptcy if settlements are not reached.

Creditors are aware of the costs and the delays that filing for bankruptcy involves, which will mean that they will surely receive less than what you are offering, and they would not get their money for several months, thus are likely to accept your settlement.

Furthermore, a bankruptcy attorney may also advise you on whether or not it is wise to fully pay a creditor who refuses to accept less. Likewise, if a creditor makes a request for payment that you dispute, a lawyer may be able to inform what you next steps ought to be.

Note that in the event that creditors agree to settle your debts for less than the amount that you owe, the IRS and state tax agencies may look at this debt forgiveness as taxable income. This may result in you actually having positive taxable income as opposed to operating at a loss. Sole proprietors and partners will be personally liable for these taxes but not owners of corporations and LLC’s. Sole proprietors and partners should speak to a tax advisor to check whether this income may be applied to previous years’ net operating losses or otherwise wiped out.

Also see:

Merchant Cash Advance Default

Small Business Debt Settlement

SBA Loan Default