Owning a business that is failing or having serious credit issues can be a challenging and traumatizing experience, however if you keep your wits about you and carefully evaluate both your assets and liabilities you can minimize the trauma through the transition.
Step one. Carefully evaluate all of your personal as well as business income, assets, liabilities and debts. These would include standard items like: inventory, land, improvements, vehicles and such. Intangibles would include good will and other brand type or marketing assets that you may have. Others would include stocks bonds cash and the like.
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As an aside, one asset that many individuals and business owners may overlook is a life insurance policy. If you are older than 65 and in possession of a life insurance policy you may be able to sell this asset for cash over and above the cash value. Many times a buy sell agreement or key man policy that is enforce can be sold in a life settlement for cash, this can be true for a policy that is a term policy with a convertibility feature as well. Whatever you do even if you are younger than 65, do not surrender these policies, talk to a knowledgeable broker first.
The next step is to prioritize. Fundamentals and basic necessities should obviously not go under or unfunded if at all possible. The list for most goes in this sort of order: food, shelter, transportation, health insurance / medical, and communications. After these you may or may not want or be able to try to keep up some obligations. As far as both personal and business credit is concerned the oldest lines of credit generally carry the most weight. Unfortunately for most these are usually their largest encumbrances and may present the biggest problems cash flow wise to keep up with. However, do know this, in the new world order of credit it is going to be harder and more expensive to get and maintain credit for the foreseeable future. Keeping one or two small lines of credit paid could be a life saver in the future. Once all your creditors see you are having trouble most will remove your ability to charge while your credit is damaged so maintaining a line or two would be for the future.
Now that you have evaluated your asset versus liability situation and prioritized you are much better prepared to handle a very big decision, that is to declare bankruptcy or not. So the third step is to decide which way you wish to handle your insolvency. Many times both in an individual or a business may negotiate with creditors for short pays on the amounts owed. This can be a much less damaging way to handle insolvency or lack of liquidity than a full bankruptcy. If for instance you owe $ 150,000 in credit cards and this a big number relative to your income or assets, you can settle these debts for less than you owe in what is called a short pay rather than declaring bankruptcy. After a time of nonpayment many creditors will take between 10 and 50 cents on the dollar. Short pays can make a lot of sense if you have some income or money left and they can be cleared up removed or mitigated from your credit report in a much smaller time frame than the 7 to 10 years that a bankruptcy will take.
Because the same goes for foreclosures as opposed to short sales step four is to price assets to sell. If you cannot afford your primary residence, investment properties, commercial real estate or other assets that are leveraged price these items to sell regardless of what you owe and contact your lenders Loss Mitigation department. List these properties as soon as possible with a realtor or broker that is knowledgeable in short sales in your area. A word of caution here, your property, whatever kind of property or asset it is, is worth not what you paid for it nor what you put into it but rather what the market will pay for it. The number that it will sell at generally would be 10% less than what the current market is. The current market is what has SOLD, not what is listed. Price your assets to SELL not to sit, and get the ego out.
Your next decision is whether to handle your creditors yourself or to hire an expert. If you declare bankruptcy you don't have an option you most likely are going to require the services of a bankruptcy attorney. If you go the short pay route many times this can be handled by yourself, however it can be at an emotional and time loss. Collection agencies can be brutal and many business owners and individuals just do not have the wherewithal to negotiate settlements themselves. A great alternative may be a settlement service; this is a company that for a percentage of the assets that you owe negotiates on your behalf. How most work is that the consumer or the business that owes does not pay the settlement company directly but rather their payment comes out as a percentage of the settlement to the creditor.
Depending on what state you live in both annuities and life insurance may offer some amount of creditor protection as well as your 401K may be creditor protected so you may wish to check the laws of your state regarding these particular assets or talk to a good broker about asset protection.
Going through a personal or business insolvency can be very challenging, however if you have a realistic assessment of your income, assets, liabilities and debts and you have an outline of the steps that you need to take it can be a process that you can get through in a reasonable time frame while still maintaining your dignity. This is not meant as tax or legal advice. Please consult a tax or legal adviser if you have specific questions.
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