Early in our work together we will discuss your facts and goals in order to determine if it is possible to utilize one of the common alternatives that fall short of filing for bankruptcy.
A note of caution: these alternatives, if done improperly can actually cost you money, time, and may even damage your bankruptcy case. For example, if you initially get your debt reduced in a negotiated workout, but then you end up filing, you just wasted that time and money. But, it gets worse. Your debt reduction may create an income tax bill, a bill that must be paid no matter what, even if you eventually file for bankruptcy.
Workouts - The pros and cons
A smooth out-of-court workout is all positives and no negatives. The problem? The vast majority of workouts are neither smooth nor practical. Very few counterparties are simultaneously able and willing to voluntarily take a financial hit.
Pros of workouts -
No bankruptcy - Nothing shows up in the public record, credit reports, etc. By avoiding filing now, you will still be able to file in future years if necessary.
Flexibility - Parties have far more flexibility to tailor the terms to suit their own goals. You can choose with whom to negotiate a workout. You may decide to only approach some parties (like a lessor), and not all parties (like a customer or supplier). In bankruptcy, all parties must be notified.
Speed - All legal proceedings are slow. An ideal workout could be agreed upon and concluded in a few days or weeks.
Cost - A smooth workout will be much less expensive than a full filing.
Oversight - No court appointee is there overseeing or approving the workout. Nor will it be necessary to have a trustee off-stage, monitoring the business and settlement agreement for many years after filing.
Cost - If a creditor reduces a debt, you may owe income tax on the amount forgiven. You do not owe income tax on debts that are eligible to be wiped out by a filing.
Other creditors - If you can’t successfully renegotiate with all your creditors, they can still pursue their legal actions.
The practical considerations:
It may be difficult, or impossible, to corral the critical mass of parties with a financial interest. If there are only one or two counterparties, and if they are not institutional parties, then it may be possible to make a workable deal in tight timeframes.
It is much easier to negotiate a workout if your primary goal can create a win-win. For example, re-negotiate a lease with enough incentives to make it more palatable for the landlord than walking away in bankruptcy and leaving them with a hard-to-fill vacancy. Contrast this with negotiating to reduce a debt; here, the counterparty has no hope for future profits. This makes them highly unlikely to settle for anything less than what they would get in a filing, and that collection comes with essentially no effort or expense on their part.
A cautionary note about debt consolidation / settlement firms -
Although these firms are focused on consumers with unsecured debt, not small businesses, it is still worth a caution. A vast majority of the time, these firms do consumer debtors more harm than good. Following their instructions could seriously damage your credit score. But, the biggest drawback is the very high fees. If you pay high fees, you may as well hire a bankruptcy lawyer to help you negotiate your debt down, and then file if the effort fails. If you needed another reason to steer clear of these firms, the final kicker is the income tax you have to pay on the amount of the debt that was forgiven.
Contact us for help
Business Bankruptcy Solutions helps Coloradoans lower their debts, renegotiate contracts and save their businesses. Call (720) 674-7311 or email now to schedule a free consultation. We will discuss the problems facing both your business and personal finances and the tools we can use to achieve your goals. We draw upon decades of legal and business experience to provide you with actionable solutions. With BBS on board, we’ll help you weather this storm.