Small Business Debt & Legal Options During the COVID-19 Outbreak

One obvious response to accumulating debt as a small business is to file for bankruptcy under Chapter 11 or potentially Chapter 13. However, you may be able to salvage your financial situation with less drastic methods. You could consider selling your business if you can find a buyer, assuming that selling it eliminates your personal liability for business-related debts. Or there may be ways to liquidate the assets of the business to pay off the debts and give you a fresh start.

If you are personally liable for a certain business debt, you may face a lawsuit from a creditor if you fail to pay off the debt. This could result in a judgment against you that may lead to the loss of your personal assets. Debts that are left over after the sale of your business may become your responsibility, depending on the form that your business takes. This makes it a high priority to either resolve the debt or reach an agreement about repayment with the creditor.

Selling Your Business

Finding a buyer for a business that has significant debts may seem improbable, but many prospective buyers are willing to take a chance on a business that had a strong track record before running into recent difficulties. The buyer may believe that they can revitalize the business by introducing a new strategy, or they may believe that the market for what the business sells will rebound. Selling a business usually will net the owner more money than selling off each of its assets individually. You may even find yourself with extra money that you can put toward your next business after paying off the business debts.

The process of selling a business can be simpler than selling off individual assets because fewer parties are involved. You may be able to negotiate a specific arrangement for handling the debts with that buyer. Depending on the situation, you might persuade the buyer to assume the debts of the business for which you are not personally liable, in exchange for a reduced purchase price. On the other hand, the buyer may prefer to not assume liability for the debts but instead pay you a higher price that takes the debts into account.

Alternatives to Selling Your Business

If you cannot find a buyer, or if you are personally liable for the debts associated with the business, you may need to simply sell off the assets of the business. In many cases, the value of the assets will exceed the debts, leaving you with surplus funds. Handling the sale of the business assets on your own usually works better than allowing a bankruptcy trustee to handle the sale. You should be able to maximize the sale price more effectively than a trustee would.

In some cases, creditors may be open to settling a debt for a lesser amount than the full amount that you owe. It may not be worth their time and money to bring a lawsuit for the remainder of the debt. If the alternative is pursuing the debt during a bankruptcy proceeding, a creditor will realize that they may never receive full value. Thus, they may have more incentives than you realize to reach a reasonable settlement.

Last reviewed October 2023