Is Debt Negotiation Right for Your Cleaning Business?

If your cleaning company has fallen behind on its loans, the honest answer is this: debt negotiation is usually right only when the business can no longer keep up with everything it owes, but can still handle one sizable monthly payment, or one lump-sum settlement.

If you are cutting costs everywhere you can, and still barely keeping up with your creditors, a debt negotiation can help. If you can show enough hardship, and a good-faith attempt at meeting your obligations, many creditors may be willing to accept a reduced settlement. Creditors differ on when and how they approach settlement, but many commercial lenders open that door only when the business is in default. Others are open to it only after they have charged off the loan as bad debt. Each lender has its own policies and approval layers.

If you owe money to a company, large or small, they don’t have to agree to a debt negotiation, even if you have been a good customer in the past. A business may even sue you for money, whether you are in debt negotiations or not. The federal law on debt collection covers debts owed for personal, family, or household purposes. If a debt is purely business related, it’s not covered.

Debt settlement programs often advise clients to withhold payments to creditors. But a creditor can file a lawsuit for collection without settling. That’s how a judgment creditor can get at the money in your business bank account, even if the debt was a credit card balance or other unsecured obligation.

Knowing What Each Lender Can Do

If your accounts payable are mounting and your line of credit is maxed out, your lenders each have their own ways of protecting themselves. If you are the owner, you may have signed personal guaranties on some or all of them, promising to pay up if the business defaults. Others may hold liens, or claim the right to take money from your bank account when payments come due. Short-term lenders tend to debit money daily or weekly, rather than monthly. That means they may tap funds meant to pay the staff or vendors. Knowing what each lender can do will be key to settling any debts for less than full value. You can’t determine what to offer a bank without knowing what leverage the bank has over your company. As a rule, lienholders keep their rights to take back the equipment. But if the item is used, it may not resell for as much as the loan balance. That gap can open room for negotiation. If you have given a personal guaranty on a company loan, you can sometimes get the lender to release the guaranty in exchange for a higher payment, or restructure the terms instead of settling for a lump sum.

A debt settlement may be better than a bankruptcy when the business cannot carry all its debt, but can keep afloat with lower payments. The formal bankruptcy is a public filing with the federal courts. A settlement keeps the terms and amount of the debt private. This may be important to keeping customers and vendors on board. It can also give you a way to reorganize or wind down a business on flexible terms. While not as widely known, there is another type of bankruptcy for small businesses. It is called a Subchapter V bankruptcy, and it is part of the Chapter 11 bankruptcy code. Total debts cannot be more than $3,424,000, and at least half of them must be from the company’s operations.

If you default on an SBA loan, the bank can come after your collateral and guarantors first, then make a claim to the SBA on the guarantee. The SBA usually wants a detailed financial package and an offer in compromise. If your business has a COVID EIDL loan, the SBA may be willing to cut your EIDL payments by 50 percent for six months. But the loan must be less than 90 days past due, and you must still be in business. If you are 120 days past due, the SBA may refer your debt to the Treasury for debt collection.

Taxable Income

When you owe money on an account, and the creditor forgives that amount, the IRS calls that an income event. It generally counts as taxable income the same year you were relieved of the debt. Lenders must report it when they write off $600 or more. Exceptions are debt canceled in bankruptcy, or while the debtor was insolvent, up to the amount of the insolvency. The IRS considers a person insolvent when liabilities exceed the fair market value of assets, just before the debt was forgiven.

Debt settlement is a private agreement with a lender, but it may or may not be a private fact. If you signed a personal guaranty on the loan, the lender may report the settlement on your personal credit. Weigh that against the risk of lawsuits and continued delinquency. Take care not to fall behind on payroll taxes to pay for a business deal. Whoever is responsible and willfully fails to pay them over may personally owe a penalty equal to the unpaid tax.

Talking to Creditors

A single creditor can agree on terms in a few weeks. An SBA loan or several secured lenders can take several months. And many companies carry on doing business as they are talking to creditors. Start by listing the bills that must be paid, like payroll and taxes. Business statements, tax returns, and aging reports give credibility, and a short statement of the troubles you have had can put it all in context. Before speaking to the first creditor, think of which ones could force a shutdown and start with them.

Unless you are planning to go bankrupt, negotiate with creditors only if the business can still stay on track, even after some bills are settled. And if you hire a debt settlement company, know that these firms cannot charge fees in advance.