Business Debt Relief With Bad Credit: 5 Choices Beyond the Approval Pitch

If your credit is shot and every lender you’ve spoken to has denied you a loan, it may feel like your business will never get out of its current financial crisis. As you know, there are many external factors that can put a small business in the red. However, having a cash flow crunch while having bad credit can severely limit your options for getting out.

Is bankruptcy the only path to getting out of debt? Far from it. So what can you do if your credit score makes your loan application a guaranteed “no” when your expenses keep rising or your revenue has unexpectedly dropped? You have five main choices: negotiate a workout with your creditors, payment plans with the IRS or SBA, Subchapter V bankruptcy, surrendering collateral in a UCC sale, or shutting down and passing the keys via a receivership or assignment. While bankruptcy may be the right choice for you, it can be a long, costly road, and a federal bankruptcy court may not end the process with your creditors getting paid all they are owed or with you getting the fresh start you’re seeking.

Negotiated Agreement

Even before seeking a loan with a private lender with looser credit standards or going through other options, you should seek a workout with your creditors. If creditors will agree to this, it can help you avoid court and the higher costs that come with it. A workout is a negotiated agreement between a financially distressed business and its lenders, in which they come to terms that make the borrower’s loan payments more manageable. However, creditors are under no obligation to work with you. Workouts are an informal remedy for businesses in distress, and they usually result in principal reduction and/or maturity extension. In the case of a composition agreement, there are several creditors who all agree to take some smaller amount, which may be paid over time, as full payment of the debt.

But one danger of getting debt canceled is that the IRS generally treats the forgiven debt as taxable income - unless canceled in bankruptcy or you’re insolvent (IRS Form 982). Also, if you got an SBA 7(a) loan, the 20%+ owners usually personally guaranteed it, so they can remain personally liable on it.

Sometimes, it’s possible to negotiate for an offer in compromise (OIC), in which the IRS lets you settle your tax debt for less than you owe. There’s an application fee of $205 if your income isn’t low enough for a waiver. Also, they will keep it even if your offer is rejected. However, for a lump-sum offer, you must pay 20% of the offer up front. For in-business taxpayers with trust fund taxes $25,000 or less, you may get an in-business express agreement, in which you agree to pay the debt in full within 24 months. This is not a settlement amount. It’s an extension of time for you to pay the full amount due. As for the SBA, with a delinquent SBA debt sent to Treasury Cross-Servicing, Treasury can add on fees up to the full cost of collection. Usually, those fees get passed on to you. Cross-Servicing generally sets payment plans based on ability to pay.

Subchapter V (Chapter 11)

Another option if creditors won’t play ball or you can’t pay is Subchapter V (Chapter 11), in which you propose a repayment plan to your lenders, who must vote on it. The filing fee is $1,738. You must file a plan within 90 days. Your plan can confirm even if a creditor class rejects it, if you commit your projected disposable income to it for 3 years (up to 5) and you can likely pay it.

Another option if your loan is secured with collateral is a UCC foreclosure sale through the Uniform Commercial Code. Section 9-610 provides for public or private sales of the collateral. It’s not like a lender can’t repossess and sell collateral without your permission anyway. But agreeing to let them do it without putting up a fight can give you leverage, especially to get owners or guarantors released from personal liability.

When all else fails and the business simply cannot be saved, you still have a few options on how you exit. In an assignment for the benefit of creditors (ABC), you turn everything over to a fiduciary called an assignee to manage and liquidate your business’s assets and use what they recoup to pay back creditors, according to the law on priority claims. An ABC comes with less red tape and the court isn’t necessarily involved, which can be a reason to go that route instead of bankruptcy. The laws and procedures for this vary from state to state. Keep in mind an ABC won’t stop creditors’ lawsuits. A receivership, by contrast, is a court-supervised remedy. In a receivership, a receiver is appointed. That person is an officer of the court whose main job is to preserve the debtor’s assets and prevent waste. A receivership is usually requested by a secured lender worried their collateral will not be preserved.

Financial distress has a number of possible resolutions. What’s best for you depends on who you owe, how many creditors there are and whether the business can survive. While bad credit limits your options, it doesn’t necessarily rule out these routes to recovery.