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By Dean Kaplan, president of The Kaplan Group
Sometimes, no matter what you do, you just can not make it work. If your business is in danger of closing or declaring bankruptcy, you need to do everything you can to protect your investment, your reputation, and your credit rating. Here’s some advice to keep in mind:
Taxes – Taxes must be paid first. The money that you collect for payroll and sales and income taxes technically belongs to the government. The Internal Revenue Service (IRS) has very broad powers and can take control of your business equipment and property, and even seize funds from your personal retirement account. You can be held personally responsible for the taxes, even if your company closes and you file personal bankruptcy.
Payroll – Some states have laws that impose penalties for not paying your staff. Again, in some situations you can be held personally liable. More than that, paying the people who work for you is the right thing to do.
Personal Guaranties– If you have signed a personal guaranty, you are at risk personally, even if your LLC or corporation closes.
Overdue Bills – Any bill that is 60 days or more overdue puts your credit rating at risk. If you don’t want your other vendors and creditors to know you are struggling, don’t let them find out through a credit report.
Secured Debts – If you have used an important piece of property or equipment as collateral, you will also want to pay that debt first. By contrast, credit cards are generally unsecured debt. That means that while it may cost you money in interest or fees, and hurt your credit rating, not paying a credit card will not force your business to close.
Insurance Premiums – Running your business without proper insurance will leave you open to much bigger problems.
Professional Dues, Non-essential Subscription Services – If you are having trouble paying other bills, cancel any non-essential Software as Service (SaaS) subscriptions and memberships. Make sure to read your agreement and give appropriate notice.
Credit Counseling – A credit counselor can offer a free consultation to help you evaluate your options. Beware, there are predatory “credit counseling” agencies, some even hiding under the guise of being nonprofits. The National Foundation for Credit Counseling can help you find a reputable, nonprofit agency.
Collection Agents – As a collection agent, I know that most people do not enjoy hearing from us. But, there’s no need to panic. Having a collection agency call doesn’t mean your supplier hates you or has given up on you. They may just feel it’s a better use of their time to outsource this particular task. Hearing from a collection agency can actually be good news as collection agents are less likely to become emotionally invested in the situation. You can try to negotiate a payment plan or even a discount if your circumstances warrant it. Make sure you understand any fees or interest payments associated with your payment plan, as well as any penalties if you are not able to follow the plan. Try to negotiate not paying interest and fees to your vendors as this just adds to your burden. If you negotiate a payment plan, request a provision that gives you a discount if you pay it off early.
It’s important to know that commercial collections (when one company owes another company money) and consumer collections (when an individual owes a company money) are different. Much of the same advice we would offer an individual receiving debt collection calls also applies to businesses. Take notes, and make a record, of any phone calls and ask for information in writing. Do not agree to anything if you do not think you owe the money. Consumers are protected by the Federal Debt Collections Protection Act (FDCPA), but businesses are not. So, you cannot simply tell the collector to stop calling you. The statues of limitations are also different for commercial collections.
Bankruptcy – Many business owners view bankruptcy as the ultimate failure, but that shouldn’t scare you away from getting the information you need. Talking to a bankruptcy attorney doesn’t mean you have to declare bankruptcy. Because courts are operating in a limited capacity right now, it will likely take a significant amount of time before you can legally declare bankruptcy. Most attorneys will offer a free consultation, but you should still fully research them before scheduling.
Unfortunately, some business owners will need to file for bankruptcy either to restructure debt or to close a business with bills that simply can’t be paid back. Some types of bankruptcy (Chapter 11 or Chapter 13) may allow you to continue to operate while making smaller payments. Chapter 7 can help you close your business and avoid protracted legal battles over unpaid debts.
Debt can be stressful but with a little prioritization, financial management and the right advice, you can come out on top.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.
