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Negotiating debt vs. bankruptcy for struggling businesses

If there's one thing that businesses, both large and small share, it's debt. According to the Federal Reserve Statistical Release for the fourth quarter of 2014, nonfinancial business debt rose to $12 trillion in the U.S. When these debts force companies out of business, there's typically no shortage of creditors lining up to have their accounts settled. This leaves outgoing ownership groups to ponder which course of action is best to settle those debts: offering a debt settlement or filing for bankruptcy.

Many companies opt for bankruptcy because it places the burden of liquidating company assets on the court. The structures of their respective companies typically determine which form of bankruptcy ownership groups may face. For corporations and limited liability companies, it depends on their individual stakes in their companies' assets. Typically, they'll be allowed to file for business bankruptcy. Yet if they've personally guaranteed any debts, they may be forced into filing personal bankruptcy. The same holds true for business partnerships.

Those operating sole proprietorships who have adequate funds may find negotiating a settlement to be easier than those parties previously mentioned. When going this route, it's recommended that an inventory of creditors be made in order to establish a priority list of business debts to be paid. Emerge180.com suggests that such a priority be determined based upon the stage debts are currently in. Those stages are outlined as follows:

  •          Is the original creditor still attempting to collect?
  •          Has the debt been assigned to a collection agency?
  •          Is a lawsuit pending?
  •          Has a judgment been awarded?

Those debts in the latter stages should be given top priority. Given the potential for insolvency, creditors could be more willing to accept a settlement offer for debts at this stage. 

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