Some Are Smarter Choices Than Others When Dealing With SBA Loans, Back Taxes, Foreclosures, and More
Your small business has to perform at its best every single day to succeed in a competitive market – and that’s if everything goes your way. Even if you do everything in your control to set yourself up for success, there are so many outside factors that can prevent you from reaching your goals.
Because of the challenges you face as a small business owner, you may find that you’re struggling with debt.
This is the story of too many businesses today. However, your story doesn’t have to end there. Although debt can get out of control, you’re in the driver’s seat to explore your options and develop a strategy to get to a better place financially.
Debt relief solutions address business challenges such as:
- Business credit card debt.
- Your business lease payments.
- Merchant cash advance debt.
- Franchisor fees.
- Small Business Association Emergency Injury and Disaster Loan (SBA EIDL) debt.
- Back taxes.
- Business foreclosure.
Explore each solution to determine what can help you solve your business debt difficulties.
Debt Relief Option 1: Keeping Your Business Open As a Sole Proprietorship
The first approach for business debt relief is to dissolve your business as a limited-liability company (LLC), but keep it open as a sole proprietorship, while filing for personal bankruptcy.
Here is the strategy behind this option:
- Most business owners have signed as a personal guarantor for their business loans, meaning they are personally responsible for their business debt.
- Although you may have a limited-liability company, if your debt is personally guaranteed, you are personally responsible for it.
- Personal bankruptcy can dissolve your business debt, allow you to keep some business assets, and reopen your business as a sole proprietorship.
In Chapter 7 bankruptcy, you can see your debt completely wiped away. Or Chapter 13 bankruptcy, you can develop a repayment plan where you will still pay less than you owe. You will also be able to keep up to $60,000 in business assets related to your business, including equipment, machinery, and more, so you can still operate your business on your own.
Whether a merchant cash advance lender has placed a lien on your accounts, you owe money on a loan from your franchisor, or any other scenario with a personally guaranteed loan, personal bankruptcy can be extremely helpful.
Colorado small business owners who seek out a results-driven personal bankruptcy attorney for their debt challenges find that within two years of filing, they can be eligible for a mortgage and boast a 700+ credit score.
Debt Relief Option 2: Chapter 11 Business Bankruptcy
Some small businesses look into Chapter 11 bankruptcy for debt relief. Chapter 11 involves a debt restructure with your creditors, so you can continue to operate the business as an LLC. You are considered a “debtor-in-possession” as you develop a plan to repay your debt.
However, there are two major downsides to this small business debt relief option:
- The fees associated with the reorganization of your business end up being very costly for many business owners.
- If you’re already struggling with business debt, you may still be unable to repay, even after you develop a plan for repayment through Chapter 11. As certain difficulties pile up, such as a downturn in profitability, a reorganization may not be enough to give you the jump-start you need.
Debt Relief Option 3: Debt Settlement
Debt settlement is the process of negotiating with your creditors to land on a repayment amount that satisfies both parties. Typically, a debt settlement lawyer can negotiate a settlement that is half of what you originally owed.
Keep in mind that debt settlement only applies to unsecured debt, such as:
- Your business credit card.
- Franchise fees, loans, and interest.
- Merchant cash advance loans and interest.
Secured debt, including your business lease and loans for equipment, must be negotiated with a solution other than debt settlement, such as personal bankruptcy. However, if you have a lump sum available, or you will within six months, debt settlement could be a highly effective way to avoid paying off all your debt and starting fresh for business success in the future.
Debt Relief Option 4: Help With Back Taxes or SBA EIDL Loans
If your business has tax debt or is struggling to repay an SBA EIDL loan that was administered during the COVID-19 pandemic, you can work with an IRS or SBA attorney to find a small business debt relief solution.
SBA EIDL loan solutions include:
- Filing for bankruptcy to dissolve your business, discharging your EIDL loan debt, and reopening as a sole proprietorship, while keeping up to $60,000 in business assets.
- Liquidating your business to pay off the loan.
- Negotiating better loan terms in Chapter 5 bankruptcy, which is an amendment to Chapter 11.
Read more about your options for SBA EIDL loans in this article.
Tax debt solutions include:
- Offer in Compromise. If your taxes are from no earlier than 2022, you cannot file for bankruptcy. However, you can present an Offer in Compromise to pay what they consider reasonable collection potential.
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Chapter 7 or Chapter 13 bankruptcy. You can resolve your debt in Chapter 7 or 13 bankruptcy, if you meet these conditions:
- Your taxes are from 2022 or older.
- You filed at least two years ago.
- The IRS hasn’t assessed your taxes in at least 240 days.
- You’ve never committed tax fraud, evasion, or any other tax-related crime.
- The IRS hasn’t already filed a substitute for return (SRF), so you can resolve your debt in Chapter 7 or Chapter 13 bankruptcy.
Explore more information about tax debt relief here.
Debt Relief Options For Foreclosures: Negotiation Or Something Better?
Two common solutions for a foreclosure on a business property, including developing new payment terms with your mortgage lender in a foreclosure defense or filing for Chapter 13 bankruptcy:
Foreclosure defense:
- During a foreclosure defense, the goal is to change your mortgage payment amount, get temporary forbearance from paying your mortgage, and create a plan to cure your arrears (pay back-mortgage payments).
- A negotiation can be challenging, if your new mortgage terms are set during our current climate of high interest rates, especially if you currently enjoy a low rate. You could potentially get stuck with a mortgage payment that is higher than your former rate, even though you’ll be able to take care of your back payments under this new mortgage.
- If you’re seeking out foreclosure defense, you should question whether you’ll meet the requirements for back payments. If you have struggled in the past, you may find yourself in a similar situation down the road unless their financial outlook suddenly changes.
- Chapter 13 bankruptcy allows you to create a three-to-five year plan to pay off your overdue payments while paying your current mortgage.
- If this plan is not cost-effective, you can create a plan over a shorter period of time and attempt to refinance your mortgage for a lower payment or sell your business to pay back what you owe.
- Your other unsecured debt, such as your business credit cards, will also be discharged after three to five years of paying on the Chapter 13 plan.
Make Your Choice Based On What Will Be Most Cost-Effective For You
Some of the options we’ve mentioned keep you on the hook to continue repaying when you may be eligible for a full discharge in Chapter 7 or a lump payment in debt settlement that is half of what you owe. Still other solutions have you paying long after the three-to-five year payment plan that Chapter 13 bankruptcy affords.
Other solutions may backfire, such as foreclosure defense or breaking up a debt settlement payment plan into chunks that take longer than six months to repay. If you find that managing money has been challenging or your economic outlook hasn’t improved, it’s best to stay away from a foreclosure defense.
From a business perspective, Chapter 7 and 13 will allow you to continue running your business, whereas attempting to reorganize your debt in Chapter 5 may not.
Look for the most cost-effective choices that eliminate your small business debt entirely or discharge a large portion, so you can either start your business fresh or move on to new opportunities.
What matters most is that you have the power to continue your business if you want to, and, at the very least, repay the smallest amount of debt possible. To achieve these results, seek out an attorney for your SBA loan, merchant cash advance, lease payment, franchisor fees, back taxes, credit card debt, or any other difficulty you may encounter. An effective business debt relief lawyer will ensure your best interests are at the forefront of whatever decision you make.