Dealing With Small Business Debt: Alternatives to Bankruptcy

If your business is struggling with debt, consider some of the alternatives to bankruptcy.

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There are many alternatives to filing for bankruptcy if you are struggling with small business debt.   Depending on your circumstances, some of these options may also provide you more benefits than bankruptcy. Read on to learn more about the different alternatives for dealing with small business debt.

Doing Nothing

The easiest alternative is to do nothing.  However, it is also the riskiest.  If your business has assets, creditors will usually be quick to sue and obtain a judgment to satisfy their debts.  But some creditors may decide that the costs of litigation outweigh its benefits.  They may send a few threatening demand letters but will generally not pursue the debt further.  As a result, if your business owns little or no assets and you are not personally liable for its debts, doing nothing may work for you.

Closing the Business

Shutting down your business involves liquidating its assets and negotiating settlements with creditors.

Liquidating Assets

By selling the assets of the business yourself, you can obtain a better price for them than a bankruptcy trustee.  This means more money to pay off creditors with.  Since you get to keep the excess proceeds after paying off creditors, this can be an attractive alternative if your business has a lot of assets.

When selling business assets, identify all assets and separate the secured or leased ones from the rest because you will need creditor approval before you can sell those. After identifying all assets, use the most effective sales approach depending on the type of asset.  However, do not give away or sell assets below fair market value because you have a duty to minimize loss to creditors.

To learn more, see Nolo's article, Dealing With Business Debts: Liquidating Your Business.

Settling with Creditors

Liquidating the business gives you the option to settle the debts most important to you (such as debts you are personally liable for) first. Further, most creditors are happy to negotiate a settlement for less than the full balance of the debt because litigation is expensive and they don’t want to push you into bankruptcy where they may receive even less.  However, the IRS may consider such a settlement a benefit similar to income so it may result in additional tax liability.

Selling the Business

If you can find a willing buyer, selling your business may be more advantageous than liquidating it. Selling an active, functioning business will usually bring in more money than liquidating its assets individually. In addition, dealing with a single buyer is simpler than selling all assets separately.

Selling your business can be an effective way to pay off all business debts.  Alternatively, you can choose to let the buyer assume some or all debts of the business when it is sold.  However, if your business’s debts exceed its assets you may not be able to find anyone willing to buy it.

For more information, check out Nolo's article, Dealing With Business Debts: Selling Your Business.

Special Note if You Are Personally Liable for Business Debts

If you are personally liable for a business debt, you must pay it off or have the creditor release you from liability.  Otherwise, the creditor has the right to go after your personal assets if the business assets are not enough to pay off the debt. (To find out if you are personally liable for business debts, see the articles in  Bankruptcy for Small Business Owners.)

By doing nothing you risk the creditor suing you and obtaining a judgment that can be enforced by selling your personal assets.  If you liquidate the business, make sure to settle and pay off the debts you are liable for first.  If you sell your business, consider asking for at least enough money to pay off these debts because even if the buyer assumes the debt you are still on the hook if it is not paid.

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