Q: Hi Steve – From reading your articles, I see you used to be a bankruptcy attorney and I would like to tap that expertise. For various reasons, my business has accumulated a lot of debt. But the thing is, I don’t want to file bankruptcy. Any suggestions on how to get out from under, aside from BK?


A: Too much debt can definitely make life and business very difficult. But, notice I said, “too much debt.” I say that because another thing I 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, the expansion went south, and you charged a week-long trip to Hawaii, that, needless to say, is bad debt.


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All of which begs the question: What do you do when you have too much bad debt? Essentially you have three 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 it is usually best to try and work out a payment arrangement with the creditor. Maybe they can give you more time to pay, 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 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 cents on the dollar. As such, anything over that amount is profit. That is good news for you insofar as negotiating a deal, but yes, bad news for your credit rating (that’s a different article.)


What you can do at this point is call 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 are crazy, etc. But if you can get together a lump sum payment of, say, 50 percent of the total or so, and offer that, you just may find they are willing to listen.


But in order to take advantage of this method you have 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 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 bankruptcy: Yes, I understand that no one wants to file bankruptcy, 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 will likely have to close the doors to your shop and the bankruptcy trustee will liquidate your assets to pay your creditors what they’re able. A Chapter 11 or 13 filing are types of reorganizations whereby you repay some of what you owe over time.


The good news about an 11 or 13 is you get to keep the business open. And from a personal perspective, if you are really so deep in debt, even a Chapter 7 can be a relief since at least it ends the stress associated with managing a lot of bad debt.


No matter which choice you make, it will take you a few years to get a decent credit rating again. In reality, that is just the cost of doing business sometimes.


Learn how to define personal bankruptcy from Better Money Habits.


Struggling to keep up with your payments? When your financial situation calls for it, seeking the services of a good credit counseling agency can help you get back on track.
Credit counseling is a service offered to people with excessive debts as a possible alternative to bankruptcy. A credit counselor will work one-on-one with you to provide financial education, credit analysis and a working budget. For most who speak with a counselor and are serious about working their way out of debt, counseling has proven to be a successful alternative.
We have put together a list of external websites that may be a good starting point. These non-affiliated sites offer a wide range of counseling, assistance and recommendations for managing credit and reducing debt.
Non-Profit Credit Counseling & AdvocacyDescription
Association of Independent Consumer Credit Counseling Agencies layerA member-supported national association representing non-profit credit counseling companies that provide consumer credit counseling, debt management, and financial education services
National Foundation for Credit Counseling layerPromotes the national agenda for financially responsible behavior and builds capacity for its members to deliver the highest quality financial education and counseling services
Government Financial & Debt EducationDescription
Federal Trade Commission layerA U.S. government institution that protects America's consumers by providing help for choosing a credit counselor
Consumer Financial Protection Bureau layerA U.S. government agency that protects America's consumers in the market for consumer financial products and services
Financial Literacy and Education Committee layerThe U.S. government's website dedicated to teaching all Americans the basics about financial education
National Financial Education Network Database for State and Local Governments layerA national database that brings together representatives from different areas and levels of government across the nation to advance financial education efforts




About Steve Strauss


Steve Strauss Headshot New.pngSteven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest, The Small Business Bible, now out in a completely updated third edition. You can also listen to his weekly podcast, Small Business SuccessSteven D. Strauss
Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice. Bank of America, N.A. Member FDIC.  ©2019 Bank of America Corporation

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