In a downsized economy, many businesses are focused on buying out competing businesses, or selling to long time employees, often assuming or assigning the business liabilities as a part of that transaction. The intention is honorable, however the execution may not be as simple as it seems to pay off someone else's debts.
Question: "I manage a small business with five full time employees. I want to buy the business, it is a LLC, but has a significant debt comprised mostly of credit cards and a bank line of credit. The debt is around $80k. The owner is ready to go bankrupt. I want to purchase the business and wonder if I can arrange to pay less each month. We pay nearly $2500 a month on the debt and I would like to close the accounts and pay around $1000 per month. Can we tell the creditors that we will pay a reduced amount each month, take it or leave it? It is a good business worth saving."
Answer: When buying a business, you will not automatically assume the debt, as the prior owner has likely signed a personal guarantee. Whether or not the owner is still involved with the business, they are responsible for payment. However, if you are assuming payment of the accounts, you should call the creditors with the owner on the line, and have them authorize you as payer. As well, you need to ask to be put into a hardship payment program as you have described the need for a lower payment. This may or may not be commensurate with your suggested budget; however, most credit card companies will offer this, although some not until the account is delinquent. The purpose of these programs is to lower interest and payments for a period of time usually from 9 months to 5 years. At some point you may also elect to negotiate settlements with the creditors to pay the accounts off at a discount. If you do assume responsibility for payment, make sure that no one including your new employees will have charging privileges and that the lines are closed from further activity. This will help prevent "issues" as you are attempting to pay off the balances.
Even more common is the notion that many small business owners have, which is if they have incorporated and can elect to no longer pay for the businesses debts and there will be no recourse by creditors against them personally. What they fail to realize is that since most bankers weren't born yesterday, have issued products whereby 9 out of 10 require personal guarantee. Therefore even if the business should fail, it is the responsibility of the owner to pay, regardless of his loss of income through the business.
Question: "My LLC failed and I have two business credit cards of which approximately $45k is owed. I just finished a six month hardship program. I'd like to know if my personal credit score will be affected if I stopped paying on these debts. I haven't paid my corporate renewal fees for two years. I didn't use my social security number to open these accounts only my business ID number.
Answer: If you have not already discussed renewal of the hardship program with your creditors, you should if you want to continue to pay the debt down. Many will extend this up to 12 more months. As well, it is difficult to say if you did or did not really personally guarantee the lines. Most banks require this even if you never provided a social. Simply defaulting and hoping they don't come after you personally is risky without a plan to settle or file bankruptcy at some point. Most creditors are aggressive with collections and may possibly file suit to secure payment on the account. If you are able to offer up a settlement amount that is less than what you owe, you might want to so as to prohibit further collections actions.
Question: "If a business is incorporated and has outstanding debt that has been sent to a collection agency and now is threatening to sue in court what happens to the debt if we just close the business? I understand that they may try to collect against us personally. If I am married and we have our assets in both of our names and my wife is not part of the business, can they still pursue our personal assets?"
Answer: Depending on the type of business debt it is important to identify whether or not any security such as collateral or personal guarantees exist. This will determine the leverage a creditor may have in the collections process. Just so you are aware if you have not established an independent business credit score (which reports separately than your own individual score) and acquired trade lines using the corporation's creditworthiness only, than chances are high that some personal guarantee exists. If this is the case, the debt will not go away if the business does as it reverts to the guarantor. Secondly, collection agencies cannot sue you; this is usually only done by law firms conducting collections. They also must be located in your state of residence to file suit. If you live in a community property state such as California, and there is a personal guarantee then your combined assets could be jeopardized if a lawsuit occurs and judgments are awarded. One thing you can do if you are in default is attempt to negotiate a discounted settlement if you have funds to do so. You can also engage the help of a commercial debt negotiator to do so for you, or if you are being sued than you must hire legal counsel and address the matter promptly.
Question: "I own a small home based business but it has not provided any monies for the past year and I have decided to file the business as non-active. I have two credit cards, each of which are now over their credit limit and I am paying minimal payments personally to keep the creditors away. However since it is a small business credit card problem, the creditors have started to place 60 day past due on my credit report and my scores have tanked. All I am doing is sending good money after bad as I can't pay the full amount. Would I be better to let these two credit cards go through to collections and then settle with them for a smaller amount since my credit score has now gone so low I can't get any personal loans in any case?"
Answer: To clarify, your creditors are not reporting to your personal credit score because you have a "small business credit card problem" but rather because you have most likely placed a personal guarantee on the credit cards, which makes you responsible for their payment whether your business is solvent or not. If you elect to settle your accounts on your own, you must understand that creditors do not typically discount accounts that are "current". Also, there are inherent risks, included in this are escalated collections efforts or even legal collection action. You must also be prepared to settle when your accounts are considered to be in serious default with lump sums of money. If you owe a significant amount (usually considered over $10K) you might want to get a reputable debt settlement firm to handle this for you as they are likely to have relationships with creditors that can yield greater discounts on your accounts. Just know, that everything has a price, and you must decide the upside (like saving money) or downside (like sacrificing credit scores, possible taxation on forgiven debts and/or other possible risks) of how best to handle your accounts.
And lastly, a most common issue is what to do when you are unable to pay on a Small Business Administration (SBA) backed loan. These loans are typically issued by financial institutions and are usually secured by a collateral commitment by the borrower. Non-payment of these loans can be very risky and collateral may be repossessed as required by the bank to collect.
Question: "I had a small LLC business which recently closed. I owe quite a bit on my SBA line of credit through a major bank. I haven't been able to make payments and the account has been turned over to a collection agency. They have threatened me with taking my assets, charging me a ton of money in fees and for legal action. I have replied with a letter requesting to work out a monthly payment which I can afford. I got a letter from the agency today stating that I individually and my company have sufficient assets to warrant civil legal proceedings. The letter also noted that I couldn't sell any equipment from the business. I had planned to sell it to pay them as it's in storage. I am working part time and am willing to make payments on this but I can't come up with what they want. Should I file for bankruptcy? I'd rather not".
Answer: "Based on the information you provided, I can suggest that if the debt has gone to a "collection agency" not a "law firm" they themselves cannot sue you, nor should they be using that as a threat. If it is a law firm, particularly one located in your home state, they may have those intentions and you should consult with a lawyer to discuss your options. That said, the "collection agency's" only job is to collect what is owed, and as much of it as they can get as a settlement. They usually won't make payment arrangements. You would need to get the original lender to recall the debt and try to work something out with them directly. If you cannot, than depending on what you owe, you might offer up a lump sum settlement for a fraction of the amount and ask for terms to get that paid in 6 months or less. As for the sale of assets, you may have pledged them as collateral and the bank may be required to attempt the sale on your behalf before the SBA will repay the guarantee (backed portion) on the loan. Either way, the sale of most business equipment rarely yields enough to repay debt in full and whether you or they sold it there would likely be a deficiency which you would be responsible for. Don't offer up any more information to the collection agent as they are going to apply every angle to pressure you for payment. Also you must consider if your SBA agreement is attached to your real property as an asset. Get in touch with your local SBA office or the original lender to see if they are still willing to work something out so you can get back on your feet and not fall further behind with the loan.
If you are faced with these or similar issues, I recommend seeking the help of a professional, either an attorney, CPA or a business debt counselor who can assess your situation and help prescribe a course of action. Remaining proactive and getting all the facts can highly increase your chances to take appropriate measures to resolve the issues and land your business back on its feet.