Do I Need Collateral to Get Approved for Business Debt Relief?

If your business is struggling with debt, you may be wondering if you need collateral to get approved for relief programs like bankruptcy or debt settlement. The short answer is — it depends. Let’s break it down.

What is Collateral?

Collateral is an asset that a borrower pledges to a lender to secure a loan. Ultimately, it ensures that the lender isn’t the only one that has something to lose. If the borrower defaults on the loan, the lender can seize the collateral to repay the borrowed funds. Collateral can be a physical asset, such as a home, business real estate or equipment; or a non-physical asset, like accounts receivable or cash in the bank. Collateral requirements vary from lender to lender and depend on the type of loan you want and how much you’d like to borrow.

Unsecured vs Secured Debt

Unsecured debt is not tied to any collateral. Credit cards, lines of credit, and signature loans are typically unsecured. Secured debt is tied to collateral like a mortgage or auto loan. If you default on unsecured debt, the lender can sue you but can’t seize assets (unless they get a court judgment). Defaulting on secured debt lets the lender take the collateral. Big difference!

Does Collateral Matter for Debt Relief Programs?

It depends on the program. Let’s look at some common options:

• Bankruptcy: There are two main types for businesses — Chapter 7 liquidation and Chapter 11 reorganization. Collateral doesn’t affect eligibility for either. But it does impact the process.
• Debt Settlement: Debt settlement involves negotiating discounted payoffs on unsecured debts. Collateral isn’t relevant since you’re not pledging assets. Your creditworthiness does matter though.
• Refinancing/Consolidation: Refinancing replaces old debts with a new loan. You’ll likely need collateral for secured business financing. But not for unsecured consolidation loans.
• Workout Agreements: Informal workout agreements are negotiated directly with creditors. Collateral doesn’t impact eligibility. But it can provide leverage in negotiations if lenders know assets are available.

The Bottom Line

Collateral isn’t formally required for any major debt relief program. But it can influence the process and your negotiating position. The key exceptions are refinancing secured debts or obtaining new financing. The best approach is to discuss your specific situation with a legal and financial advisor. They can explain how collateral affects options for your business. Don’t assume you won’t qualify for relief without pledged assets. And explore all alternatives before putting more collateral at risk.