Small businesses run aground all the time on accounts of debt. This eventually leads to the ruin of the owner’s personal finances for, believe it or not, there is a thin line between your business and your personal finances.
Unless you are rich, and by rich, we mean Leonardo DiCaprio-buys-an-island kind of rich, you know how hard it can be to start a business without borrowing one or other type of loan somewhere in the initial years of running the business.
And then things go haywire and you cannot pay the business debts. And you start getting a barrage of calls from creditors and debt collectors, asking you to pay or …
Don’t pay! I mean, if paying will not get you out of the business quagmire that you have sunk to, why pay? Let the debts go. Forget them! You will need to be tricky, but then, how would one get through life without playing the tricky card every now and then in their lives?
Businesses are unable to meet their obligations due to many things
Recovering out of personal debt and financial disaster is not easy. For a business, it is ten times harder. However, it is not impossible. However, sometimes, you have to employ some extreme measures as long as they are not illegal, to skip paying the debt altogether. For example, when your business has been hit by a natural disaster and you have lost everything, you will want to know how to avoid paying the debt altogether.
Desperate times call for desperate measures, so they say, and this is very true. After all, when push comes to shove, you need to pull a trick out of your hat to get through a hard patch in your business life.
Many business people have had to employ certain “tricks” at least once in their lives to get through a hard time in their business. Therefore, you will not be the only one, or the last one. However, know this is not healthy but sometimes, you do find yourself in a quagmire and you would have to do nasty things to get out of there.
And the statistics aren’t any friendly either as they show that three out of every five businesses will fail before they get to five years. Now, if yours falls in the category of the businesses that are going to fail, you have to be smart about it.
No one sets out to start a business so that it can fail. Every businessperson has high hopes that his product or service will change the world. He hopes to be the next Warren Buffet, Mark Cuban or Richard Branson. However, unknown to them, fate always has something else in store for them.
Despite all of your good and great intentions to make the business survive, to pay back what the business owes other businesses, to employ many people and change the world, well, where there is success, failure is always looming close by, bigger than the shadow of death.
Small businesses, especially in their initial years of establishment, are always overwhelmed by debt. A few get through and manage to pay their debt somehow, but many do not get through. However, facing unmanageable debt does not mean that you should close down. You can still find a few ways to get out of paying the debt.
So many things influence the economics of doing business anywhere in the world. From the world markets, technology to politics, you can go through unprecedented economic hardships anytime and as such, your business could be facing many business debts. If your business is hit an economic blow by inflation and your loans start accumulating more interest, you could find yourself in a quagmire.
Sometimes, you have to be smart. Ok, well, scrap that… you have to be smart all the time! This is why you must desist to pay any business debts if your business fails. If you did everything by the book and the business still refused to bring in any income, meets its debt obligations and so on, it is time for you to look for the best options out, if possible, leaving all the debts behind.
- Declare bankruptcy
Declare bankruptcy and you will be able to keep the hounding creditors out of your back. The first order the bankruptcy court will give is that they should not harass you at all. Believe it or not, peace of mind is what you need most when you are facing tough times.
Most people ask when bankruptcy is the right path for a small business to take and we say that this is when you are so pressed by debts you can barely raise your head. Granted, the bankruptcy smudge will stay on your record a long time, but it is an option to skip paying debt. In fact, bankruptcy is also the right action for you when facing many personal debts.
So the question you should be asking is not about whether to file for bankruptcy or not. It should be about the best type of bankruptcy for a small business. Here are a few pointers:
Chapter 13 bankruptcy – This is the best option for a sole proprietor. Chapter 13 is only allowed for sole proprietors and individuals. You will get to keep all of your assets, which would otherwise have been sold under Chapter 7 bankruptcy. In fact, after the court allows you to reorganize how you will pay what you owe, you can re-establish the business. You may also be required to pay only a portion of your business debts, or all of them.
Chapter 7 – This is the best options for a partnership, corporation or other business as it wipes all the business debts and one is allowed some exemptions to protect personal and business assets. If the business is totally insolvent, filing chapter 7 is a good idea as a trustee will take over the liquidation of the business for you, while you can move on with your life, get employed or start another business.
Chapter 11 – Only go for this option if you have a large business, a publicly traded company and you are a high net worth individual. Otherwise, it is totally unviable for a small business owner.
- Default judgments
Just sit back, relax and wait for the creditor to move to court in the hope that you will not show up for the judgment. Anyway, statistics show that up to 95% of debtors never show up in court and this leads to the default judgment being passed. This is what many creditors want! Do not let them off that easily. Dress up, show up and ask them to show proof that you owe them.
When a creditor sells a debt to a debt collector, the documents are not usually passed to the debt collector. They never remember to ask for the documents. So when you get to court, demand evidence. No papers mean no case. It is dismissed in your favor. If you do not go to court, the case goes to the creditor’s favor.
There is no law, which states that a judgment debtor has to pay. In fact, the only thing required is a creditor to find out what assets the debtor has. If they do not write to the debtor requesting him to pay, you are not required to pay.
Whether a judgment has been passed against you, just resist to pay. Nothing will happen.
- Skipping bills and not paying old debts
Just assume you do not have a bill to pay, just forget it and that is that. Then you can worry about the consequences later. What happens is that your case will be handed over to a debt collector who will call you, holler at you, threaten and scream at you and then when they see you are not budging, they will get tired. Many debtors have been tossed from one debt collection agency to another, to no effect.
What happens is that your personal credit will suffer. Even if that happens, there are still business debts for people on bad credit. If there is no chance of your business recovering, forget its unpaid bills, especially old bills.
If the business had an unsecured debt, forget that one too. If you have old business debts, do not pay them. The law requires that debts older than 7 years be expunged from your credit record. If your business is already closing down, then there is no need to pay its business debts. It is much better to first think of paying the more pressing debts like your car loan and mortgage.
If you think that a late bill payment already ruined your credit, there is no need to pay it for what more can they do to you. If a business fails, you will be left with a lot of debt to pay. Do not pay it since it will not bring your business back.
- Changing ownership of the business
You can sell a business with debt so that you avoid paying off the debt, leave another person to worry about that, take what you can and move on with your life. In any case, all business have one kind of debt or other. However, if you are changing business ownership exclusively because of too much debt that you are unable to pay, it ought to be a very viable business.
In any case, the amount of the debt will be subtracted from the total sale price that you get for the business, so you will get a lesser amount than what you would have gotten.
Whether you are making a stock or an asset sale in your business, the buyer will incorporate any business debts that you have in the price. The reason is that debt will affect the value of the business. It is good to disclose all the business debts and liabilities that you have so that you do not shortchange the buyer. This is a good way of getting out of business debt.
- Close the old business and start a new one
Who says you cannot just close the old business and start a new one just like it? It is a good way of getting out of business debt, but it is not entirely foolproof, so you will have to be careful how you do it.
Find out what the law in your state says, and what the Federal law says too. For example, if you close an old company with the intention of getting rid of bad business debts and then transfer the assets to a new business, you may be liable for successor liability.
But there is a way around that. Just make sure that the new business shares nothing with the old business, not telephone numbers, not physical or postal address and not even a building. If it does, then you will be deemed liable for successor liability.
Everything must be new, from bank accounts, tax records, insurance, physical address and everything else. You must not transfer assets, equipment or even inventory. It must be a brand-new business from scratch, but still, you may be liable for successor liability, even after taking all those precautions.
- Closing bank accounts
If you close the old bank accounts of your business, will that help you not to pay business debts? Maybe it can, especially when you are personally held liable for your business debts and your wages can be garnished.
Closing your bank account should be the first step to closing your business. If you wish to close the business and start a new one, you will need to get new bank accounts, new address and tax account. Nothing must be related to the old business.
There is no law that can prevent you from closing a bank account of your business. If you have a sole proprietorship, you just go ahead and close the accounts. If it is a limited company, you have to vote on it. If it is a partnership, you have to agree with your partner.
You are a business owner, you may think you are smart, but no one is. We are all slaves to the times and therefore, it is good to move with the times. A decade or so ago, you could have gotten away with these tricks of desisting to pay back what you owe.
Not anymore brother! You see, it takes just a few minutes, sometimes less than a minute to dig up all of your details from various databases.
Ok, you may skip the country altogether, but the business debt collectors will reach you through your family. They know your auntie who lives in Baltimore and your uncle who brews homemade beer in TexasJ. Heck, they know who your roommate from way back in college, and they know your first love.
Many shenanigans for nothing. Just pay up! Save yourself all of this trouble. It is not worth it. Not in this era of the internet of things.
Besides, if you refuse to pay, you will not be able to borrow in future. Unless this is your last business debt and then you die, you will need to borrow more in future. Blame it on the culture of consume-first-and-pay later.
You cannot escape paying business debt in this era. So, just pay, save yourself, your family and humanity at large a whole load of trouble that could have been avoided in the first place.