If you are in debt, and thinking about corporate bankruptcy options, what should you do? A reader, Wendy, had this question:

Mr Credit Card,

You’re website is the best I’ve found regarding credit questions and suggestions. Thank you for helping so many of us out!

I am overwhelmed, as many are, right now. My husband was a very successful contractor for the three years he was in business. The economy tanked and none of our potential customers can get loans right now.

Due to the newness of the business, we are still paying on a high amount of equipment and were paying our employees full pay for over a year after prices dropped dramatically and we were not making any profit.

Basically, we paid all of our bills with credit cards and a home equity loan to stay a float during the rough times and now, our debt is bursting at the seams. By some miracle we have managed to make all our payments on time but are not seeing a quick fix to the economic problems that directly affect us.

I have been applying for a second job and my husband is trying to stay busy with small garages and porches while looking for jobs as well. We have applied and interviewed with countless employers to no avail. The competition for job hunting is ridiculous at the moment.

I don’t know how much longer we can pay our bills. Our debt is well over 500,000 including business and personal and our monthly payments are $14,000.00. We are constantly agonizing and stressing over if we will be able to make our payments. It is greatly affecting ours and our young children’s happiness. We are 32 years old with 2 small children.

My question is, should we file bankruptcy and if so, what kind? Should we do credit counseling? Should we try to get a huge consolidation loan?

I am not sure what to do where we haven’t made any late payments yet and with such an unknown income future if we would be able to pay our debt off in 5-10 years as suggested in previous forums.

Most of our business debt was purchased using our personal names so could we file a business bankruptcy only?? Please inform us better of the huge decision we have ahead of us.

Wendy

Thanks for your question Wendy. You are going to want to contact several experts so that you fully understand your options, but I can give you a place to start.

Debt Negotiation Services:

Debt Negotiation Services (Or Debt Reduction Experts) are companies that exist only to negotiate debt on your behalf. (If you find a good one that is!).

So, what would happen if you used a debt reduction expert?

You would start by getting together your entire financial picture. How much you owe, and to which creditors. Keep a list of the contact information for everyone that you owe money to.

Then, you contact a debt reduction expert. They will take a look at all of your debt, and your current creditors. Then, they will work out a payment plan with you. You will write your check to them, and they will pay your creditors off.

Why would you want to do that?

Debt Negotiation Experts will negotiate the total amount of your debt downwards. (Sometimes to as little as half of what you now owe.) They can also re-negotiate to lower your monthly payments, and they have experience cutting deals with lenders to get you out of debt faster.

How it works:

When you turn your information over to a debt reduction expert, they will call your creditors, and negotiate new terms for your accounts. This is usually done by closing out your revolving credit accounts (This does hurt your credit score.)

Once the accounts are closed, they can offer a lump sum settlement on the debt (if you have the money available) or they can work out a reduced payment plan over a number of years.

The good part is, your debt is being expertly managed, and you can make one payment and focus on raising your income.

You do want to make sure you are dealing with a professional if you do this though, and they may still not be able to help you – only someone who can take a look at your complete situation will be able to tell you that.

We work with a very good debt negotiator here at Ask Mr. Credit Card. His name is Sam Sky. You can find out more about Sam by listening to our interview with him, and you can also fill out a contact form to ask him specific questions. It’s free to do that.

So, that’s one option. If you know that you can make regular monthly payments (even if those payments are less than what you are paying now) then it could be a good option.

However, it will be difficult to run a business with no open credit accounts, so there may be some loans that you want to leave out of the negotiations, or handle yourself.

The Do It Yourself Method:

The do it yourself method involves contacting each of your creditors yourself to negotiate terms, and / or getting a large consolidation loan with better interest rates.

It really wouldn’t hurt to investigate your options here. However, it could be very difficult to get a bank to offer you a loan that large in the current economy. You did say that you hadn’t made any late payments yet – that is a real plus. Especially if your credit scores are high enough.

Still though, if your business is in trouble then a consolidation loan may be hard to come by. If you take this path you will most likely have to sell some of your business assets, and re-negotiate the terms of your loans on your own.

This could actually hurt your credit score too, especially if you had a series of late payments while you were attempting to negotiate.

So, how do you do it?

To start with the do it yourself method, you will want to check both your business and personal credit scores.

Last time I checked, personal FICO scores were around $50 each. (This could vary depending on FICO’s promotions).

Business credit reports from Dunn & Bradstreet can cost upwards of $500 for a one-time report.

It’s not absolutely essential to know your credit score before applying for a consolidation loan, but it does help you to be more prepared.

Try to use a lender that you have worked with in the past, that you have a series of on-time payments with. Speak with them in person and take all of your financial information with you.

I’d love to tell you that you can definitely get a large consolidation loan, but with the credit crunch hitting banks hard, this is probably not going to happen.

If you have a lot of high interest rate revolving debt, you can try to transfer even a portion of your balance to something better.

Even if you can’t get a jumbo consolidation loan, you could possibly get one to cover the parts of your debt with the highest interest rates. This will lower your monthly payments a little.

Once you see about getting a loan, you will also need to begin negotiating with your creditors yourself.

This will involve contacting your lenders individually and explaining that you are having trouble making your payments. You can ask them about hardship programs, or reduced payment arrangements. Some of them will work with you, some of them will not.

For lenders that do not want to work with you, you can try this tactic:

Go a few days past due on your account and then call them back. The collection representatives are definitely trained to help you set up payment arrangements. It stinks when you have to do this because you get late marks on your credit report, which lowers your credit score. (That’s why I say apply for the loan first). Unfortunately, some companies are not willing to work with you until you are behind on your payments.

To decide whether or not this is something you really want to tackle yourself, sit down with your husband and take a good look at your financial situation, especially as far as the business is concerned.

Where can you cut back? Is there any place left that you can squeeze more money out of? Do you have any assets that you could sell to negotiate lump sum payments with your lenders?

My honest advice, if you choose to repay your debt, is to speak with a professional debt negotiator. Because you have so many accounts, and a large amount of debt, it will be easier and better for everyone if you have a professional handle it.

Have a pro go over the numbers – what you owe, how much you can pay each month, etc.

Find out how long it will take you to repay your debt if they can reduce it for you. Many times professional debt negotiators can get results with your lenders that you can’t.

The generally accepted advice is that if you can pay your debt back in less than 8-10 years, then it is better to do that than to declare bankruptcy.

So, before considering bankruptcy, at least see if they can help you – it might save you a lot of trouble. Make sure you ask a debt negotiation expert whether or not they think bankruptcy is a better option for you. If they do, you will want to speak with a lawyer in your state.

I’m going to respond to the other half of your question concerning personal and corporate bankruptcy tomorrow, so please check back. I wanted to give each of your options specific attention.

Have a question for us? Leave a comment below!

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This entry was posted on Thursday, March 19th, 2009 at 07:45 and is filed under Bankruptcy FAQ, Credit Cards FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.