If you are going out of business, owe a significant amount of money to one or many parties, trying to figure out how you will pay your bills and get out of debt can be incredibly stressful. At Royal Legal Solutions, we often field many frustrated questions about how to pay off debt when closing a business. Below are the most common paths owners take to address these financial obligations.
For most businesses, financial obligations are fulfilled when the decision has been made to close in one of three ways.
- Sell and negotiate. If you prefer to do it yourself, most individuals opt for selling off all assets (liquidating) and negotiating with creditors on their own. Negotiating with a creditor may result in a settlement agreement. A settlement agreement is a deal made between you and a creditor that will release you from any further liabilities. For the most part, this option, also known as a work out, will cost you the least in legal or outside fees. However, as a novice, you may not be able to work the same deals a professional would or have the same connections.
- Hire a professional. Some business owners opt for hiring a professional, such as a company or a law firm, which specializes in helping a financially devastated business that is going out of business. These professionals will typically handle the majority of your closing details. Professionals typically charge a specific fee or take a percentage of the total asset value.
- Let the courts handle it. For those who decide to file for bankruptcy, the courts will sell off any assets and remove all remaining debt. There are two main types of bankruptcy claims business make: Chapter 7 or Chapter 13. Chapter 7 bankruptcy claims can wipe out all unsecured or supplier debt as well as lawsuit judgments. Chapter 13 bankruptcy claims, on the other hand, allow owners to repay some or all of the debt over a specified amount of time. Whichever type of bankruptcy occurs, it is typically the most expensive, time-consuming option available.
All about Size
Often, the path you take to get out of business-related debt is dictated by the type and size of your company. For sole-proprietors, you may be able to utilize the work out method and settle debts yourself after liquidating all assets. However, if you cannot offer creditors enough or a settlement is improbable, bankruptcy is likely the best solution. Sole-proprietors are personally liable for any business debt, which means their homes, vehicles, and personal finances can be garnished in a lawsuit from a creditor. By filing either a Chapter 7 or Chapter 13 bankruptcy claim, sole-proprietors can prevent this. Partnerships are also personally liable for business debts. For these, a personal Chapter 7 bankruptcy claim or hiring a professional is the most advisable option. For most corporations or limited liability companies (LLCs), owners typically are not personally liable for business debt. If your business cannot afford to pay or settle with creditors, a business Chapter 7 bankruptcy or professional may be the right choice. However, if you personally assured a business debt and cannot pay it, you may need to file for a personal Chapter 7 bankruptcy claim as well.
Royal Legal Solutions
The professionals at Royal Legal Solutions are here for you. If you would like to set up a consultation, whether it is to just go over options for a work out solution or you want to discuss bankruptcy claims, we are standing by.