Sometimes businesses fail. It’s sad but true. Whenever someone starts a business they obviously have high hopes that everything will turn out great. But sometimes, things just don’t work out.
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I have invited guest contributor Daniel Ng here today to share his tips on how to negotiate debt settlement when a business is being closed.
How to Negotiate Debt Settlement When a Business Is Being Closed
When you set up a small business, it is with the hope that it will be a grand success. However, according to the expertise, about 20% of new businesses fail in their first year, about 50% of small businesses fail in their fifth year, and only 30% survive for 10 years. When you decide to shut shop, it is quite likely that there will be a number of debts outstanding.
Typically, these will be credit cards you have used for business expenses, unpaid rentals to landlords, utilities, etc. Quite often, there will not be enough cash to meet these obligations in full so after notifying the creditors of the closure, you will want to settle the dues if they can be reduced substantially failing which, the remaining option is to file for bankruptcy.
Ignoring the outstanding debt is not a good idea as collection agents will keep on calling on you and you might get embroiled in lawsuits that can make life miserable for years.
Negotiating Business Debt Settlement Deals
Assuming that there is not enough cash to pay all the creditors their due payments in full, you need to figure out how much they will settle for. It is very evident that the amount of reduction will depend on the creditor type, the attitude towards debt settlement, and the legal status of the debt.
For example, a credit card company knowing that the debt is unsecured and you could be heading to bankruptcy may be more amenable to settlement than another creditor from whom a loan has been taken with a relative or friend co-signing it. However, irrespective of the legal status of the debt, if you are in a position to pay 30-70% of the dues, it can be well worth trying to settle the debt.
It is not uncommon for creditors to settle for 50% of the dues or even less with hard negotiation. In case, debt settlement does not work out, bankruptcy is the only viable option for wiping your slate clean and making a fresh start though you will have to reckon with the impact on your credit score for as long as 10 years.
Prioritizing the Debt Payments
When you are going out of business, you cannot pay off your debts at random, because in case you have to file for bankruptcy, all your financial transactions in the pre-liquidation period will come under intense scrutiny by the bankruptcy trustee.
Secured debts have to be paid off using the asset that has been used as the collateral. If you want to retain any asset, you should pay off the outstanding on that first. If you are returning a secured asset, especially to equipment lessors and there is a deficiency that needs to be addressed by you, you should try to negotiate a release from the contract before your return the equipment.
However, if this is not possible, bear in mind that the deficiency will need to be treated just like any other unsecured debt that you may have. Read debt settlement feedback online to have a better idea of how to deal with equipment lessors. Having a frank discussion with the equipment lessor, especially with your lawyer in attendance, can help a lot to make it clear that renegotiating the contract termination is actually beneficial for everyone concerned.
You should then pay off your employees their wages and benefits as well as loans for which you are personally liable. With the remaining cash, you should attempt to pay off your credit card accounts and other suppliers of business services.
Dealing with Unsecured Creditors
Once you have notified all your unsecured creditors of the liquidation of the business, you will start receiving calls demanding the dues to be paid. It is usually the best policy for you to inform them that you are trying to arrange as much cash as possible so that a fair settlement can be arrived at with all creditors.
In the meantime, sit down with your accountant and prepare a detailed list of all your unsecured debts reflecting how much principal and interest payments are due. Arrange to sell off all your assets and realize all your dues from your customers so that you finally know much cash you have to settle with your creditors.
Regardless of whether you have just a few creditors or a large number, you should have a written document to send to all of them explaining that the business is being shut down and the amount of cash that is available to pay off all the unsecured creditors. The letter should also make it clear that you are willing to offer each creditor the same percentage as a full and final settlement of their dues.
You should also send across a release letter for them to accept so that you can make the necessary payments and thereafter have no further legal obligations to pay any more money to them. As a matter of courtesy, you should also call each one of them up and invite them to meet in case they have anything to discuss.
You need to make it clear that all creditors need to accept the settlement for it to go ahead. If any creditor is unwilling to accept the terms or want to sue you, you should invite them for a meeting involving your lawyer who will be able to explain how the settlement offer has been arrived at what the consequences of non-acceptance are likely to be, including bankruptcy that would leave them high and dry.
As irate as they may be, creditors will invariably understand if the settlement has been arrived at on a fair and transparent basis and that it is in their best interest to accept the terms of the settlement.
Both legal suits and bankruptcy proceedings take months to finalize that they would perhaps be no better off after spending money and effort in litigation. It is wise to have an attorney by your side throughout the process as he can advise what to do in case of a dispute.
Daniel Ng is a freelance writer who has been writing for various blogs. He has previously covered an extensive range of topics in posts, including business debt consolidation, Finance, E-commerce, and start-ups.