Some Business Debts in Collections and Others Current? 5 Ways to Build One Plan

A common mistake is to segregate the debts that are past due from the ones that aren’t. But in reality, a small business owner’s debts are all part of a single financial problem. Most debts can be negotiated, even if not yet past due. And the solution is a single plan: get everyone you owe money to agreeing to an amount that fits within the business’s cash flow.

The most powerful tool for negotiating debts is a clear idea of what’s owed, so the first step is to make a list of all debts and expenses. Don’t omit things that seem awkward to change, like a lease or an auto loan. That way, you can see all expenses and all debts side by side. The more realistic you can be about all the things you have to pay, the better. Since it’s probably too soon to know which other debts can be negotiated, leave everything on the same list until all the negotiations are done.

Using the list of debts, make a table showing total expenses, including loan payments, for the next few months. How much is due each month? Starting where you are now, can the business pay those amounts? Are there bills that will take longer to catch up on? That’s where negotiation comes in.

The biggest misconception is that debts are first priority because they are in collections, or the creditor has an attorney on it, or the creditor is calling for payment. But that doesn’t necessarily make the debt more important. What is relevant is what they can do to you. Examples: an auto lender with the right to repossess its collateral and an unsecured credit card company that can only sue if not paid are both serious problems. But which one should you focus on first? At the very top of your list are debts secured by collateral you need for the business, like an equipment loan or a commercial mortgage. A threat of repossession or foreclosure is one debt you want to stop ASAP. Secured lenders (loans guaranteed by collateral) can repossess without getting court permission. Despite that power, the law won’t allow the lender to take the collateral if seizing it would be a “breach of the peace.”

An unpaid tax bill is especially dangerous. A business that doesn’t pay its withholding taxes can put at risk any officer or employee who had control of how the money was spent. If the IRS decides that money was paid to suppliers or employees instead of the government, the responsible officer can be made to pay a penalty equal to 100% of the unpaid tax. An SBA loan is a government loan. Generally, if the business isn’t making payments, after 180 days of delinquency the SBA turns the account over to the US Treasury for collection, which can garnish up to 15% of disposable pay. As for debts in collections, if a collection agency tries to use abusive or deceptive methods to collect a business debt, it is almost never covered by federal debt collection law.

The Best Situation You Can Get

Make a note for each debt: What is the best situation you can get with that particular lender? For example, if a debt is too large to pay in full, what’s the smallest percentage they’ll take as a settlement? What’s the longest payback time they will allow? Most businesses will be looking for some combination of a longer term, reduced monthly payments, and less interest. A lot of creditors will not accept a settlement for less than the amount owed, but will offer a long payback time, a lower interest rate, or both. Other creditors may accept less than the balance if paid in a lump sum. The creditor has to agree to accept less, but here, their choice is agreeing to less now, versus the debtor’s defaulting on the entire debt later on. In the end, it takes a call to find out.

Late-payment fees and other default penalties can be very expensive. It may be easier to persuade a lender to give up an abusive contract term if the borrower is making payments, even if those payments are small. A lender with a lien or a personal guarantee may be willing to reduce, forgive, or release them in exchange for real payments.

Dealing with taxes is different than dealing with other debts. A better plan is to get a separate agreement just for the taxes. The IRS has a simple installment agreement program for businesses that owe trust fund taxes. If the business owes $25,000 or less in tax, penalties and interest, and is current on filing and paying what’s owed now, then it can get an installment agreement. If there are no trust fund taxes, then the debt can be up to $50,000 to qualify.

Your leverage is the benefit you can promise to your creditor that lets you get a concession out of them. With every negotiation, your fall-back option is what to do if you and the creditor can’t make a deal. Your best negotiation option is to show the creditor that they have something to lose if they don’t make a deal. One place to start is the lease or contract terms, and any law that applies. Read the terms to see if they let you stop paying for any reason. Lawsuits over those terms are expensive and time-consuming. Lenders prefer to have a debtor offer them a benefit, like payments now, in exchange for a concession, like a long repayment plan. The down side is, if the debtor loses the lawsuit, they may owe a judgment, with interest, and the creditor’s attorney fees.

Chapter 11 Bankruptcy

One last option may be to file a Chapter 11 bankruptcy. The court will require a reorganization plan, but the goal of the plan is the same as the goal of a nonbankruptcy plan. The bankruptcy lets the business stretch payments on debts, and in some cases, pay less than 100%. An automatic stay protects the business from legal action while it’s operating. Also, many creditors who at first refused to negotiate will soften in the face of a Chapter 11 filing. A small business can file a Subchapter V bankruptcy, too. Debts must be at least 50% related to the business, and total $3,424,000 or less. If confirmed over creditor objections, the bankruptcy plan will require all disposable income to be committed to paying creditors for the first three years, and possibly up to five years.

Just closing the business instead may not cut your obligation. If there are personal guarantees, or if the business used tax money to pay bills, you may still be on the hook. A closed business may still have to pay off taxes and secured debts.

Start with Your Highest-priority Debt

Prioritize your negotiations by what’s likely to go wrong first. Start with your highest-priority debt on your list. Before you start, make sure you know what you can promise the creditor you’ll do to help them, and what your benefit to them will be. Talk to the creditor and see if they’ll agree to an offer. If they will, get it in writing, including how much you are paying, when the payments are due, and that they’ll consider the debt paid in full, if that’s the deal. A single negotiation will usually not make the whole plan work. Even if a lender has said no to your plan, ask for the next-best deal. You can come back and talk again. Once the debts can be arranged into your cash flow, your plan will say what the business is going to do about each debt.