Bankruptcy is the legal procedure of seeking relief from outstanding debts, and it is available to individuals or entities. Mostly, filing for bankruptcy happens after a court order is granted after the debtor decides on this course of action. Debtors must first complete a standard credit counseling course within 180 days before filing a bankruptcy case. This course is aimed at determining if you qualify for bankruptcy and if so, which category is right for you. Mounting debts can be crippling, and that is why Los Angeles Bankruptcy Attorney has prepared this guide to help you understand your options and make informed decisions on managing your debt.
What are Chapters 7, 11, and 13 of Bankruptcy?
These chapters refer to the various strategies for handling bankruptcy, and they all have different legal and financial implications. Your attorney will advise you on the most effective way of finding stability in your finances.
When you file for Chapter 7 bankruptcy, you can keep running your business and may retain ownership. Your attorney will work hard to reach the best possible outcome, so you maintain full control of your enterprise.
Chapter 11 is a debt relief process targeting small enterprises that have run into hard times due to financial upheavals, such as the 2008 economic meltdown. This filing allows your business to stay afloat during and after a period of extreme distress. What's more, restructuring a small business under this law can reduce your payment obligations and terms of payment while balancing income and expenditure.
When you file for Chapter 13 bankruptcy, you retain ownership of the business while working hard to pay back all or a massive portion of debt within a stipulated timeframe. The court will typically give you 3 to 5 years to repay outstanding debt while keeping your property as you reorganize your finances.
Having understood the three different filings for bankruptcy and their unique benefits, let us delve into the various strategies for managing debt, so it does not cripple you.
- Calculate Total Debt and Identify Creditors
The first step in understanding debt is quantifying the exact amounts that you owe and their corresponding creditors. If you feel that the debt is a constant fixture in your life, you are not alone, and it does not discriminate with age. According to a Forbes article, young Americans aged 18 to 25 owe $1.05 trillion in debt as per Equifax and the New York Fed Consumer Credit Panel. Debt increases considerably as the population advances in age: 30 – 39 years ($2.9 trillion) and 40 – 49 years owing $3.4 trillion, then declines at the 70+ mark ($1 trillion). The report notes that student debt and mortgages are the significant sources of outstanding debt, and not all debt is bad for you. For instance, taking out a loan to further your studies may lead to a better-paying job, or you could sell your home when the market is favorable and turn a profit.
Making a list of all debts brings clarity of the full picture as you start the debt repayment process. This level of transparency, including deadlines, ensures that you don't miss out on those payments that you can easily handle. You can do this manually or ask for a copy of your credit report from credit reporting bureaus like Equifax who provide it at no cost.
- Determine your Monthly Budget
Knowing how much income you have coming your way versus expense is vital to the debt management process. Your income comprises of salary/ wages from full-time or part-time work, profit from residential properties, dividends, and all other sources of money. On the other hand, your expenses comprise of necessary costs like rent or mortgage, groceries, utility bills, entertainment, etc. If payments are too high, the next important task is to do away with things that you can comfortably do without, for instance, a gym trainer or high-end apparel. Remember, managing debt calls for a rational approach to your finances and life in general, at least for the foreseeable future.
Then, determine a realistic dollar amount you can dedicate to paying debt each month and task yourself to remain disciplined. Having sound financial goals – e.g., how much money to put aside this year – goes a long way toward steering the desired behavior. Set a new money objective to rally behind or find an exciting challenge or creating visible triggers are useful tactics to stay on course.
- Pay Outstanding Bills on Time
Delay in paying off debt comes with late fees that only dent your finances more. Now that you understand how much debt there is, to whom it is owed, and the timelines, ensure you make these payments. We live in a digital age where we are becoming increasingly dependent on apps to automate things, including paying bills. Use a calendaring system on your Smartphone to remind you when to pay through alerts and notifications, so you are not reported to the credit bureau. Getting routine bills like mortgages, car loans, student loans, a credit card helps you tackle the more significant issues. When running a big or small enterprise, it is more than likely that you are servicing a loan, which is difficult when business is slow. If your finances allow, make at least minimum payments per month to reduce debt and subsequently the total interest owed.
Failure to honor scheduled payments will upset your creditor, and they may report you to credit bureaus. These reports hurt your credit score, which impacts you negatively, for instance, when you apply for another loan. Simplify the process by automating small payments and ensure there is enough money in your account at each month.
- Negotiate Better Terms with Creditors
As mentioned above, having a sufficient balance in your account is not always feasible, especially when your business is struggling to make ends meet. When you recognize these early warning signs, have a conversation with creditors to design more favorable terms. Lenders for mortgages, credit cards, and car loans have stringent conditions, but you can still renegotiate smaller monthly payments. There are debt relief companies that act as intermediaries between you and creditors, negotiating lesser terms but be wary of scammers. For instance, your creditor may accept a lump sum payment to cover the remaining installments. If you wish to use a debt relief company, check their reviews on Better Business Bureau to avoid being taken advantage of by criminals.
Freedom Debt Relief is a reputable company that has signed over 600,000 clients in its program, having settled debt amounting to more than $2 billion since 2002. With such exemplary results, it is no wonder that clients flock to them each year. Other top players in the debt settlement industry include Cura Debt and New Era Debt Solutions. When finding the right agency, consider factors like accreditation (e.g., the American Fair Credit Council), low fees, and the kinds of debt they handle.
- Understand the Impact of Debt on Credit Score
A credit score is a vital financial tool that gives you access to loans with lower interest, mortgages, credit card offers, etc. The higher your score, the more favorable terms you are likely to get, and the vice versa are also true. While there are several credit scores, FICO® Score is the standard score for 90% of lending decisions when you apply for a loan, for example. This scoring model uses five essential factors: a history of payments (35%), outstanding debt (30%), the credit history (15%), new credit (10%), and credit mix (10%). Based on these computations, the lowest credit score is 300 and the highest 850. Even the most impressive score is vulnerable to financial woes like maxing out your credit card. If your credit card allows a $10,000 limit, it is highly advisable to maintain cumulative credit of less than $3,000. Late payments, say by one month, negatively impact your score by 90 points and up to 110 points in extreme cases.
- Appreciate the Value of Credit
Most people aspire to be debt free, and while this is an excellent idea, credit is not always a bad thing. As seen above, credit history and payment history account for 15% and 35% of your credit score respectively. Keeping an active line of credit and repaying it every month helps you down the line when you need to borrow money maybe to infuse cash flow in tough economic times. Creditors are always impressed by prospective clients who pay bills on time as this gives an inkling into how they will handle this new loan. Even if your credit score has been bad, you can always build it back again to get in good terms with lenders.
- Bolster Cash Flow Management
When running a business, cash flow is of the essence to keep things moving, such as paying vendors, utility bills, salaries, and wages, etc. Better handling of payables and receivables helps you anticipate how much is needed to keep the business running, including paying monthly installments to creditors. This focus helps you identify areas that need trimming to keep expenses low such as finding cheaper vendors or downsizing staff. Cost-saving measures improve cash flow, thereby leaving extra money to pay off debt, starting with highest-risk loans that usually charge a higher interest.
- Debt Consolidation for Small Enterprises
Restructuring your debts helps you regain control of your finances and facilitates growth and expansion in the future. Running a startup is highly stressful, and most entrepreneurs invest personal money into the business at least in the early stages when proof of concept is direly needed. Depending on how long it takes to find investors or secure a grant, you may soon become overwhelmed by personal and credit card debt, thus, stagnating growth. Consolidating outstanding debt into a single debt-consolidation loan saves not only interest rates but also time spent. Before securing additional financing, it would be wise to consult with a financial advisor to examine your personal and business finances.
- Increase Business Revenue
One of the drivers of mounting debt is declined revenue owing to a bad economy or other factors like the political atmosphere. If the business has been slow, you need to devise ways of getting customers through the door, such as giving mark-downs to loyal customers and aggressive advertising to reach new customers. Following up on outstanding debts helps in boosting account receivables, so you have more cash to keep things running.
If the bad debt is weighing you down, consider offering incentives to get customers to clear their balances, and implement measures to encourage prompt payments in the future. In the end, your business model must achieve product/market fit in a way that creates money, and this goes for startups and more established companies. Minimum Viable Products and Lean Marketing and Experimentation are some of the useful tools entrepreneurs can employ to determine their winning formula.
- Negotiate better Amortization Schedules
If you don't wish to engage debt relief companies, you may consider renegotiating with lenders on amortization timelines for current loans. Spreading the repayments over many months or years gives you breathing room to gather more cash flow as the economy recovers. The more time you have to pay back loans, the less financial pressure you will experience.
You can offer to pay additional principal if need be as long as your required payment is down to a minimum. This way, you can guard your cash flow by channeling it to more pressing matters like paying staff to avoid attrition since this would leave you vulnerable to declined outputs.
- Do Away with Hidden Charges
Lenders are known to be smart with how they communicate details about loans, and if you are not keen enough, the fine print could have unfavorable clauses. Watch out for these hidden charges: origination fees, automatic rate increases, payment processing fees, prepayment penalties, etc. When they accumulate, these charges can rack up more debt that only hurts your finances. Cross-collateralization is yet another old trick used by lenders to seize money in your other active accounts when financial struggles kick in. Having other accounts elsewhere is highly advisable to shield you from these predatory actions by seemingly fair lenders.
- Hire an Experienced Credit Counselor
Becoming smart in financial matters does not happen overnight, not even for the most successful entrepreneurs. Credit counseling is a great course to undertake in your quest for financial literacy so you can grasp the extent of your situation. Learning how finances work is the first step to making better decisions, so you don't get into this situation again. Things are so bad that according to Forbes, two-thirds of adults cannot pass a simple financial literacy test. The statistics below point to a poor understanding of how money works:
- 43% of students are not paying back student loans
- 38% of households have debts from one or more credit cards
- 33% of Americans don't have any retirement savings at all
- 43% of people can't gather $400 in emergencies
The government responded to this outcry by designing April as the National Financial Literacy Month. As you can see above, the country desperately needs mass education on finances from a personal level to businesses so we can make smart choices moving forward.
- Handling Personal Guarantees
In many cases, securing a loan calls for a personal guarantee, which is a written pledge from a business owner or executive guaranteeing payment on a loan if the business fails to pay. This guarantee is not secured, and therefore, not connected to your assets like the primary residence or business stocks. To mitigate the damages when things go wrong, limit this personal guarantee to just yourself, so your significant other remains unscathed.
Banks typically ask for unconditional guarantees, but you can negotiate based on a percentage of the outstanding loan or the actual dollar amount. Also, you are not mandated to provide full personal financial information to the bank; instead, draft personal financial statements within reasonable disclosure.
You can reduce personal guarantee after repaying a certain amount or upon improving on critical financial metrics. Another measure is not having your spouse cosign the warranty so that assets under their name cannot be touched if this pledge is called. Taking out personal guarantee insurance (PGI) limits your guarantee to reasonable levels as it covers up to 70% of the insured net liability.
Contact a Bankruptcy and Debt Expert Near Me
Running a business or managing personal finances are delicate tasks that call for careful deliberations to avoid common problems. In extreme cases, like years of economic upheavals or aggressive competition from the market, managing debt can be an impossible task. Depending on how things stand, filing for bankruptcy may be the only option to buy you extra time to pay off debts and get your finances back on track. Call our Los Angeles Bankruptcy Attorney at 424-285-5525 to guide you through this process so that you can make informed decisions moving forward. Together, we will weigh the pros and cons of each debt management strategy and determine the most suitable options for you.