Should I Close My Business Before Debt Settlement? Pros and Cons

Deciding whether to close down a struggling business or try to save it through debt settlement can be an agonizing decision for any entrepreneur. On one hand, closing the business provides certainty and allows you to move on. On the other hand, giving up on your dream without exploring every option can leave you wondering “what if?”

There are good arguments on both sides. Here are some of the key pros and cons to weigh when deciding whether to wind down operations or work with creditors to settle debt and keep the doors open.

Pros of Closing Before Debt Settlement

Closing down the business before attempting debt settlement provides certainty and control. Here are some potential benefits of winding down operations first.

Avoid Further Losses

If the business is struggling and losing money every month, closing it quickly stems the bleeding. You avoid throwing good money after bad in a vain attempt to save a failing enterprise.

Of course, you still need to settle up with creditors. But closing shop can keep losses from snowballing even further. The business stops racking up new liabilities each day it limps along.

Free Up Time and Reduce Stress

Running a troubled business that is falling behind on obligations can be enormously stressful. It becomes all-consuming just to keep the lights on from one day to the next. Filing for closure provides relief from the nonstop uncertainty.

Closing down operations frees up mental bandwidth that can be redirected towards mapping out next steps for dealing with business debt. Without a sinking ship to bail out each morning, you have time to research options, consult professionals, and carefully evaluate the pros and cons of debt settlement.

Make a Clean Break

Closing the struggling business allows you to mourn the loss and start grieving. As long as you hold out hope of rescuing operations, emotional closure remains elusive. Filing for dissolution provides a definitive endpoint that facilitates acceptance and healing.

With the enterprise shuttered, you can focus energy on personal financial damage control rather than endlessly debating whether the business could somehow be saved. Closure sets the stage for developing a plan to settle up with creditors.

Cons of Closing Before Debt Settlement

While closing down a struggling business provides certainty, it also eliminates any chance of saving operations through debt restructuring. Here are some potential downsides to consider.

Lose Chance to Save Business

Closing the business cuts off any possibility of emerging from difficulties and turning things around. While survival may seem unlikely, comeback stories do happen. With creditor concessions, the business might get back on stable footing.

If you simply dissolve the business entity, that option is off the table forever. And if the market ultimately rebounds, you may end up regretting giving up so soon. Debt settlement provides at least a fighting chance to work through temporary troubles.

Still Owe Money to Creditors

Dissolving a business does not make its debts disappear. You remain personally obligated for any personal guarantees made on company borrowings. Creditors can (and probably will) pursue you aggressively for payment, even without the business generating ongoing revenue.

In fact, closing up shop may make creditors less willing to compromise since they know the well has run dry. With no incoming cash flow, they have less incentive to settle for pennies on the dollar. They’ll simply pursue personal assets.

Damage Credit and Hurt Future Prospects

Business borrowings that you fail to pay impact personal credit history and scores. Defaulting hurts your ability to access affordable credit down the road. Low scores due to an abandoned business make it tough to finance a car, rent an apartment, qualify for a mortgage, or even land some jobs.

Such black marks stay on credit reports for seven years. That’s a long time to deal with damaged credit because of giving up on debt restructuring prematurely when closing down a business.

Settling Up Business Debt Without Closing

Rather than dissolving a struggling enterprise, an alternative approach is attempting to negotiate discounted payoffs through debt settlement firms like Delancey Street. Here is how debt settlement works and its pros vs. cons.

How Business Debt Settlement Works

Debt settlement involves negotiating agreements whereby creditors accept less than full repayment to close out bad debts. A settlement typically recovers 30% to 60% of the sums owed. The process provides cash flow relief that may allow the business to recover.

Key steps in the business debt settlement process include:

  1. Stopping payments to creditors to build negotiating leverage. The business instead makes affordable monthly contributions to a dedicated settlement account.
  2. A settlement firm like Delancey Street negotiates discounted lump sum payoffs with creditors when enough funds accumulate to make settlement offers.
  3. Settlements get structured across multiple creditor accounts to maximize cash flow relief. As some debts get closed out, payments get redirected towards settling the next obligation.
  4. Most business debt settlement programs aim to resolve all eligible outstanding balances within 24 to 48 months.
  5. A debt settlement firm handles the legwork of negotiating agreements and managing accounts. This frees up owners to focus on operations.

Delancey Street attorneys have experience negotiating with all types of business creditors. From equipment financing companies to merchant cash advance providers, settlement often proves possible. But outcomes depend greatly on the circumstances of each case.

Pros of Debt Settlement for Business Owners

Attempting to settle with creditors allows a struggling business to keep fighting. Potential advantages include:

  • Avoid Business Failure: Settlements provide desperately needed cash flow relief which may allow the business to bounce back, given time. While nothing is guaranteed, the option remains open to rebuild and achieve eventual success.
  • Resolve Debt for Pennies on the Dollar: Successful settlements allow the business to resolve debt obligations for a fraction of amounts owed. Discounted lump sum payoffs provide savings that aid recovery.
  • Prevent Personal Credit Damage: Keeping the business operating means debts get paid off through entity-level settlements. This insulates owners’ personal credit from damage compared to simply abandoning operations and defaulting.
  • Maintain Pride and Purpose: Walking away from a dream without trying everything possible to save it can lead to regret and “what ifs?” Attempting settlement retains hope and purpose which has psychological benefits.

Cons of Debt Settlement for Struggling Businesses

While settlement provides a last chance for a struggling company, the reality is most distressed businesses fail regardless. Attempting a turnaround also has disadvantages like:

  • Ongoing Business Losses: The struggling enterprise likely continues losing money while settlement talks play out. This worsens the financial hole. Additional capital may prove necessary to keep things afloat.
  • No Guarantee of Settlements: Creditors have no obligation to accept discounted payoffs. They may opt to pursue full collection through legal action instead despite best efforts.
  • Risk of Bankruptcy: If settlements fail and creditors sue, the company may need to file bankruptcy anyways to discharge remaining debts. This results in business failure after all.
  • Fees and Tax Implications: Debt settlement programs involve fees for service. If settlements succeed, cancelled debt also potentially gets reported as taxable income. These costs cut into savings.

As this overview shows, whether to attempt settlement or close up shop involves an array of complex tradeoffs. There are decent arguments on both sides. Every situation proves unique based on the nature and extent of debts as well as the viability of the underlying business model.

Key Factors to Consider Regarding Business Debt Settlement

Determining if settlement makes better sense than simply closing down requires weighing various factors:

  • Ongoing Viability – Can the business survive and thrive if debts get restructured? If the model remains fundamentally flawed, settlement just delays failure.
  • Access to Capital – Are owners willing and able to contribute more cash to keep things afloat during settlement talks? Can loans get restructured? Ongoing losses still need funding.
  • Value to Creditors – A business generating revenue offers creditors more long-run payback potential than simply forcing dissolution. This motivates deal-making.
  • Collateral Protection – Will restructuring programs keep key business assets like real estate or equipment from getting seized? If not, liquidation looms regardless.
  • Personal Factors – Are owners emotionally ready to give up yet? Pride and purpose may make fighting worthwhile despite the odds and costs.

The decision matrix differs for every struggling business. But exploring debt restructuring makes sense before abandoning hope altogether in many situations. The potential remains to negotiate win-win settlements that allow the business to bounce back while still providing creditors significant recovery.

It comes down to whether owners are willing to stay the course through a difficult debt settlement process. Just be clear-eyed about the likelihood of success. Refusing to face reality once settlement talks fail gets very expensive.

Can Filing Bankruptcy Help Struggling Small Businesses?

Beyond debt settlement, some struggling business owners consider bankruptcy as well when debts overwhelm. Filing under Chapter 7 or Chapter 11 of the bankruptcy code can provide certain benefits but also comes with major downsides to understand.

Benefits of Business Bankruptcy Filings

The chief advantage of business bankruptcy lies in the automatic stay triggered upon filing. This immediately halts most collection activities like lawsuits and asset seizures. Essentially you “hit pause” on having to deal with debts.

Other potential benefits include:

  • Cancelling Certain Debts – Chapter 7 liquidations wipe out many unsecured debts. This provides a fresh start albeit at the cost of losing assets used to repay creditors.
  • Breathing Room – Chapter 11 filings let owners propose debt repayment plans buying time to regroup and turn fortunes around. These reorganizations aim to preserve the business.

Using bankruptcy in creative ways can help struggling enterprises reset finances or renegotiate terms with creditors. When structured thoughtfully, filings enable some businesses to ultimately succeed.

Downsides of Business Bankruptcy

However, business bankruptcies also come with major downsides making them risky gambles. These include:

  • High Legal Expenses – Complex filings require attorney guidance costing tens of thousands of dollars or more. These costs drain cash needed for operations.
  • Asset Liquidation – Chapter 7 bankruptcy necessitates surrendering property for liquidation. This leaves the business unable to continue absent new financing.
  • Onerous Oversight – Chapter 11 reorganizations place owners under the scrutiny of court-appointed trustees. Their involvement compromises autonomy.
  • Stigma and Public Records – Bankruptcies generate permanent public records that may scare off future partners and creditors. The stigma can linger for years.

Business owners should think carefully before pursuing bankruptcy without first attempting out-of-court debt restructuring. Settlement provides an avenue for slashing obligations while avoiding the major disruptions and loss of control over filings.

What do you think?

What to read next