6 Alternatives to Bankruptcy for a Business With More Debt Than Asset Value

Maybe your business is still doing well. Maybe it can recover over time if it doesn’t get crushed by mounting debts. But creditors need their money now. When your company is buried in debts, does bankruptcy have to be the only option?

Owing more than the company is worth does not mean bankruptcy is inevitable. Contrary to common assumptions, bankruptcy is expensive, public, and slow. You can often resolve your problems privately at much lower cost and faster. There are six paths:

• settling the debt at a discount,
• reconciling MCA debits,
• renegotiating contracts using contract defects,
• selling assets,
• closing unproductive parts of the business,
• and a wind down without courts.

Taking bankruptcy protection puts the automatic stay in place, halting all collection actions. A Chapter 11 debtor is under court supervision that can impede normal operations, and legal fees are high: $15K to $75K or more, even on the small business track. The Chapter 11 filing is public, too.

Here’s the question that points the way forward: “Given the profits the business can reasonably produce, would that be enough to make debt payments and survive?” It’s that simple. If so, reconciliation and debt negotiations are the way. If not, settlement, sale, or wind down are.

”Can’t we just roll all of this into a term loan or SBA loan with better rates?” With numerous MCAs on the credit, there are rarely term loan approvals. Chasing approvals brings hard credit pulls and often a desperate yes to another bad product. ”MCA consolidation” is usually just another MCA.

Settle or Renegotiate Debts

If your balance sheet has no net assets, making payments is a race to see which comes first: default or paying off the debt. Through negotiation, you can pay debts at, usually, 40 to 60 cents on the dollar, rather than the total amount originally owed. But settlement can be tough on your relationships and credit score, so it makes sense only as an honest answer to honest questions: When the numbers are stubborn, would you make payments for years and still be in debt?

Do you go it yourself? You can call each creditor directly to try to settle the debt. For one loan and with a lender that you can talk to, that is a negotiating position you can work out in discussion. It’s when you have several notes to make payments on that the difficulties arise. Each creditor wants to be paid off first.

When debts totaling $600 or more are cancelled, lenders report it on Form 1099-C. But if the business was insolvent immediately before the debt was canceled, it would not be taxable to the extent of that insolvency. Claim the exclusion by filing Form 982.

Finding the best move starts by buying time with reconciliation. Many owners don’t know that most MCA contracts are designed to adjust downward in the event of revenue changes. Funders often go quiet on that, never intending you to use it. A documented request can lower the daily debits 30 to 50 percent while leaving the total owed unchanged. It creates a window in which other moves are possible.

A common next step is to renegotiate with creditors whose contracts contain defects. Some examples are insufficient language to explain reconciliation, excess pulls, hidden or ambiguous fees, and usury exposure. Contract defects become leverage in negotiations, not in lawsuits. Litigation is not required, although the real option of it stands behind the negotiation as an unmistakable possibility. In a debt dispute, a confession of judgment (COJ) or account freeze can complicate things. Before proceeding, seek coordinated counsel with insights into enforcement realities in your state.

Selling assets through a sale-leaseback can be done for companies that own equipment. Trucking, construction, and manufacturing companies have capital tied up in heavy equipment, which they can convert to working capital without taking on more debt. They can use the cash to settle or renegotiate debts. But this option has long term costs. When money is tight, however, long term can be a luxury.

Keep the profitable core while closing the unprofitable parts. The business closes one or more routes, stores, divisions or locations. Partial wind-down releases cash to service the debt, allowing the business’s core to go on. Owners often resist this, but half a healthy business outlasts a whole sick one.

Wind up Privately

Some companies reach the end. For them, the alternative to bankruptcy is to wind up privately. You sell off your assets, and the company pays creditors by priority, then dissolves the entity. Less expensive and less public than Chapter 7, it works when no creditor demands otherwise. According to Delaware Code, corporations follow a list of steps to wind up. If they use the optional notice to claimants, they must set a time limit of at least 60 days after the notice for creditors to submit claims. Directors who follow the statutory steps are generally not personally liable to claimants.

Assignment for the benefit of creditors is a voluntary, state-law form of wind up alternative to Chapter 7. It is a transfer of every asset to a private trustee who liquidates the assets and pays creditors from the proceeds.

The two roads to the exits have a catch: Neither wipes out debt. Personal guarantees will survive, so the plan must address them, usually through negotiated releases from the proceeds.

Payroll taxes incur a different kind of risk. The IRS may assess a penalty of 100% of unpaid withheld taxes personally against any responsible person who willfully failed to pay, even if the business is still operating. The IRS Offer in Compromise has a $205 application fee with no low-income waiver for businesses. A lump-sum offer requires a 20% down payment paid upfront, not refundable if rejected. The business must have made its tax deposits for the current quarter and the two prior ones to qualify.

When Bankruptcy Is Right

Sometimes bankruptcy is the right option: when several creditors have sued, and the coordination has broken down, only the automatic stay stops everything. In that case, a bankruptcy attorney should be consulted that same week. A judgment creditor about to freeze the operating account should trigger that, as well as debt dominated by claims negotiation can’t touch, like certain taxes.

Any source that cannot tell you when bankruptcy is right is selling you and not advising you. Honest numbers are the cornerstone: will profits cover operating costs AND debt service? If yes, reconcile or restructure. If no, settle, sell or wind down.