Which Is Better: Negotiating With Creditors Or Filing For Bankruptcy?
It happens to the best of us: Your business is struggling, and you may be considering a bankruptcy. But is that the best option for a business that is having a hard time paying debts? Couldn’t you just negotiate your way out of debt?
Negotiation May Help
It should go without saying that it can never hurt to negotiate. Many creditors will restructure debts or defer payments or provide other alternatives, to assist a business that is struggling to pay its debts. Smaller creditors may be more willing to negotiate; they need whatever you can give to them, and they don’t have the money to lose if you should opt to file for bankruptcy.
Unsecured creditors are generally more likely to work with you than secured creditors are, as the unsecured creditors have no property to take and sell to pay off their debt. Additionally, in Chapter 11 bankruptcy, most unsecured creditors don’t get anything, and so they would rather you stay away from that option.
Older debts are more likely to negotiate with you, especially if they have been sold to debt buyers. But the downside is that by the time your debt is purchased by a debt buyer, it may have already done damage to your credit.
But negotiation only works if you have a clear plan to get out of your financial struggles, eventually—for example, you anticipate an uptick in sales, or you are waiting for a big contract to get paid on, or some other event where you anticipate more cash flow going forward.
What About Bankruptcy?
Bankruptcy may be an option, but bankruptcy doesn’t work with businesses the way it does with individuals. That’s because in Chapter 7 bankruptcy, a business doesn’t get its debts discharged the way an individual does.
You can file for Chapter 11 bankruptcy, a process that allows you to reorganize your debts, and there is even a new law that allows a quicker Chapter 11, for smaller businesses. Chapter 11 bankruptcy can allow you to restructure your debts, pay some, and get some discharged.
The drawback is that Chapter 11 can be expensive, and you may need court approval once you’re in bankruptcy, to make certain decisions about the operation of your business. Still, if you don’t want to close up shop, and you just want a fresh start, Chapter 11 bankruptcy may be something to consider.
Remember that even if debt is discharged in bankruptcy, that doesn’t get rid of any security on the debts. In other words, the ability of a creditor to take secured property, like real estate or machinery or anything you have pledged as collateral to pay a debt, still survives the discharge of the debt.
If your business relies on machinery that is secured by a loan, negotiation, and not bankruptcy, may be the best option for you.
In financial trouble? Ask us to help you deal with your business creditors. Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today.