How to Prioritize The Repayment Of Your Business Debt Obligations
With a seemingly overwhelming amount of business debt on the balance sheet and creditors calling to collect, your head may be swimming. Who should you pay first? What will be the plan to right the ship and nurse your business back to health?
Paying off business debt can be a long, trying journey. Many lose motivation and simply give up, especially when facing other financial responsibilities competing for limited resources.
Therefore, it is critically important to create a plan to address the problem head on and take control of your organization’s business debts obligations, once and for all. Thankfully, there are a few concrete, common sense rules to help you prioritize your debt repayment.
Within this article, we hope to show you how to find your debt repayment priorities and the best strategies to help eliminate or greatly reduce your business debt obligations.
Highest Interest Means Highest Priority
That is a no-brainer, right? If you were able to set up and run a business, you certainly understand that your highest interest debt must be repaid first. The shorter the term of repayment of the higher interest debt, the sooner your company’s balance sheet will truly balance.
Merchant Cash Advance debts, while not calculated in terms of interest rates and instead being calculated as a purchase of future receivables, carry extremely high repayment costs. In fact, from this author’s experience, merchant cash advance debts have the absolute highest costs of any type of business debt.
Consequently, merchant cash advance debt should be a business owner’s highest priority private debt.
The Hierarchy Of A Business Owner’s Payables
Ignoring any business debt comes with consequences, but not paying certain types of business debt will bring more dire consequences than others. Paying certain bills and debts in a timely manner is vital to protecting your business as well as your personal assets.
If you have employees and you withhold taxes from their paychecks, please make certain to file the payroll tax reports and remit those taxes to the government on time. Failure to do so, could be considered criminal theft by the IRS.
The IRS can charge you with a crime for failing to deposit your payroll taxes.
Please remember that payroll tax funds do not belong to your business, they belong to your employees. Your business merely collects and temporarily holds those funds “in trust” for the United States government.
Even directors and minority shareholders can be held personally liable if they were responsible or partially responsible for deciding to pay other pressing bills in lieu of the trust fund taxes. If your business is in such poor financial condition that it cannot pay its payroll taxes, it may be time to close down.
Make sure you continue to pay your employees’ wages on time. There are sizable state law penalties for not paying wages on the day they are due and some states may charge a penalty of $1,000 per employee, per pay period Others may impose a penalty of 30 days’ wages per employee.
Moreover, unpaid wages cannot be discharged in bankruptcy.
Independent contractors’ invoice fees do not fall in the same category as wages. Instead, a contractor has the same legal status as any other unsecured creditor, meaning that a contractor who did not get paid would have to sue you to get a judgment before being able to attempt to seize your assets or levy your bank accounts.
While child support is technically a personal debt obligation, it is also what the law considers a super-priority debt. Accordingly, it must be noted here in the hierarchy of business debt obligations because failing to pay child support could result in the seizure of your business assets.
The penalties for not paying child support can be criminal in nature. Failing to pay child support can land you in jail. Your wages or business income can also be seized by the state to pay child support.
Child support also cannot be eliminated (discharged) in bankruptcy. If your income or living situation has changed, making it more difficult to pay child support, you should report the change to the child support enforcement office immediately and take whatever steps are necessary to request a reduction in your child support obligations.
If you plan to keep your current commercial space, you must pay your rent. If you do not pay your rent on time, the landlord will not wait long to begin eviction proceedings against you.
There is no coronavirus eviction moratorium for commercial tenancy. If you can survive without your commercial space or office by moving to a much smaller space or even into a spare room in your house, consider trying to negotiate an early termination of your lease.
If you simply move out without working out the terms of early termination with your landlord, the landlord can sue you in court for the remaining months’ rent if the landlord is not able to re-rent the space.
Debts Arising from Court Judgments
If a creditor has already obtained a court judgment against you, that debt should move up in priority because by now possessing a judgment, the “judgment creditor” can enforce that judgment by taking post-judgment legal steps to seize your property, a portion of your wages, and levy your bank accounts.
Merchant cash advance lawsuits can move very quickly from the date of initial default (first missed payment) and judgment. Traditional creditor lawsuits generally move more slowly.
If you have defaulted on your merchant cash advance payments and you have not yet worked out a settlement arrangement with the lender, you must act immediately.
Please consult a qualified and experienced attorney who may be able to help you avoid the merchant cash advance company filing a lawsuit at all. If they do file, that attorney is in place to defend that suit from judgment.
Personal Liability Debts
If your business is a sole proprietorship or partnership, you are personally liable for all your business debts. If your business is a corporation or a limited liability company, you shall be personally liable only for those loans or agreements that you personally guaranteed.
With most merchant cash advance agreements, the business debtor must sign a personal guarantee to obtain the advance. When a business owner executes a personal guarantee, he or she then becomes personally liable for the repayment of that business debt.
Certain personal guarantees are stronger than others. If you are unsure what you may owe personally as opposed to business debt obligation only, please consult with a qualified attorney to help you fully understand your personal liability exposure.
A debt is secured if a specific item of property (collateral or security) is used to guarantee repayment of that debt. If you do not repay secured debt, most states let the creditor recover personal property without first suing you and ultimately winning a court judgment.
If the property is equipment that your business cannot operate without, such as a forklift, truck, or even a cash register, stay current on your payments or expect the lender to promptly repossess that property.
Merchant cash advance debt is generally secured NOT against a business’ equipment and is guaranteed instead against a business’ future receivables. This is accomplished by the MCA company recording what is referred to as a UCC1 filed in public records in your home state of business operations.
Accounts Sent to Collection, Credit Cards, and Loans Without Collateral
After several months of trying and failing to collect a debt, many creditors turn their debts over to a collection agency which will immediately launch a steady stream of letters and aggressive phone calls.
If the collection agency believes you have enough assets to make it worthwhile to sue you, the next step could be a letter from a collection attorney or straight to the filing of a lawsuit.
Collection agencies and dedicated collection law firms often collect a percentage of whatever they recover so they are generally willing to agree to a cash settlement for significantly less than the total amount owed.
This is particularly true if the collection agent or attorney believes there is a reasonable chance that you may seriously consider bankruptcy.
Credit card balances are normally unsecured, personal debts even if the card is in the name of the business.
Because this type of wholly unsecured creditor is unable to legally seize or levy your property without first winning a judgment and because credit card debt is easily dischargeable in bankruptcy, credit card balances are a much lower legal priority debt.
Credit card debt can normally be settled between 40% and 65% on the dollar (if not less) with extended repayment terms permitted by the credit card companies.
If you need assistance with the prioritization of your business debt obligations or if you feel that you have done the very best possible job that you can do in organizing and addressing your debts but, unfortunately, you still find yourself in a difficult situation with your overall business debt obligations, you now need help.
If you have not been able to resolve these issues on your own, before you end up with judgments which could result in the seizure of your business and personal assets, please contact the attorneys at Business Debt Law Group to provide you with a thorough assessment of your business debt obligations and assist you to not only prioritize your business debts, but to resolve them with pay structures that are affordable and possibly at significant discounts. Do not hesitate to call for assistance.