Accounting & Finance

What are the Alternatives to Bankruptcy?

  • 6 min Read
  • September 23, 2020

Author

Tasnim Ahmed
Tasnim Ahmed

Tasnim Ahmed is a content writer at Escalon Business Services who enjoys writing on a multitude of subjects that include finops, peopleops, risk management, entrepreneurship, VC and startup culture. Based in Delhi NCR, she previously contributed to ANI, Qatar Tribune, Marhaba, Havas Worldwide, and curated content for top-notch brands in the PR sphere. On weekends, she loves to explore the city on a motorcycle and binge watch new OTT releases with a plateful of piping hot dumplings!

Table of Contents

If a company has unmanageable debt, the founders may consider bankruptcy as their best way forward, but it’s not the only option. You can still be eligible for several alternate solutions that might help you avoid the long-lasting consequences of bankruptcy.

According to an August 2020 U.S. Census Bureau Small Business Pulse Survey, nearly 79 percent of small businesses have felt a moderate-to-large negative effect from the pandemic. Therefore, it’s a good time to discuss some common ways that can help entrepreneurs navigate challenges beyond bankruptcy.

Before adopting any of the following strategies, you should review your finances with a credit counselor or finance attorney to evaluate your situation. Ensure that your company is up to date with all fees, remittances and taxes that you owe to the government. You should also update and maintain a thorough inventory of the company’s assets and liabilities. In addition, locate, organize and review all relevant documents for accuracy, including all financial statements and profit and loss statements. Once you’re ready with all of these things, you can consider checking out the following six alternatives based on your financial situation.

Get Help from a Credit Counseling Agency

Credit counseling services can provide you with assistance to assess your finances and manage your debt. Some counseling services can even negotiate with creditors on your behalf to increase your repayment time and lower your interest rates. Therefore, counselors can help people with limited financial knowledge avert a bankruptcy filing.

A nonprofit credit counselor can help you develop an alternative plan to tackle your debts or consolidate them through a debt management program. A free credit counseling session can help you review your finances and discover which option works best for you. You should also carefully investigate a company’s track record before signing up for any counseling services.

Find a Replacement Lender

A business may be able to find a replacement lender to pay off its existing creditors. However, pinpointing a replacement lender on reasonable credit terms can be a difficult endeavor for a business on the verge of bankruptcy. There are professionals in the business of procuring financing or capital infusions for troubled businesses, although they may charge a substantial commission.

Before finding a lender, a business should first devise a restructuring plan that demonstrates it can make sufficient cash flow on a going-forward basis to enable creditors to receive a positive ROI. Start with reviewing the historical financials of the business, then prepare projections of cash flow, profit and loss and balance sheets for the term of the repayment plan. You can also consider using an outsourced financial advisor to prepare these financial projections.

Debt Settlement or Management Plan

A debt management plan (DMP) is an informal agreement allowing you to make reduced payments to your creditors based on your level of disposable income after your priority payments and living costs are taken into consideration. The DMP lasts until you pay all of your debts in full. You can sign up for a free credit counseling session with a certified credit counselor to find out whether or how you can adopt a DMP.

Considering a debt settlement or DMP can allow you to avoid the courtroom and do less damage to your credit score. You can attempt to convince the creditor to take the lump sum reduced amount to immediately settle a debt. The companies that help you in debt settlement often do not collect a fee until they reach a settlement and you’ve made at least one payment to the creditor. If you’ve got multiple creditors, they may charge a fee for each settlement.

Debt Consolidation

A debt consolidation loan can provide you with a new sum of money that you can use to pay off your current debts. Instead of paying different creditors each month, you’ll only pay one consolidated amount each month. It could be a personal loan from a bank or credit union or a home-equity credit line that allows you to borrow against your house. A home equity line of credit may offer you an alternative to borrowing against the equity in other properties.

The new loan allows you to renegotiate the interest rates and repayment terms. With lower interest rates and better repayment terms, you will usually save money in the long run while still working toward paying off your debts. However, you should always seek financial advice before taking out another loan when you’re already in financial difficulties.

Sell Assets

If your income isn’t strong enough to make debt payments, consider selling assets. If you’ve got valuable assets, you might be able to reduce debts enough not to file bankruptcy. You can direct the money you receive through your asset sales to settle your debts. Make sure you retain the assets that are essential to operating your business. Then, you can develop a repayment plan with a creditor that allows you to pay off debt in smaller installments.

Negotiate a Repayment Plan with Creditors

Negotiating a debt repayment plan requires specific skills, so it’s good to consult a financial counselor or advisor to develop a realistic and manageable proposal to persuade creditors to accept a long-term installment agreement. A financial advisor can often assist you in preparing the financial projections of the business, communicating with creditors, and formulating, negotiating and implementing the plan.

Negotiation is an arrangement between you and your creditors that allows you to make affordable debt repayments across a set period. It is an attempt by a debtor to solve a financial problem with the consent of creditors outside of a court proceeding. In this arrangement, creditors are normally repaid through future cash flow, new financing or an equity infusion.

Before offering a repayment plan from future cash flow to creditors, a business must prepare a concise plan that outlines how it will generate positive cash flow to repay its delinquent debts. You can negotiate for lower interest rates and reasonable payment schedules to allow the business to continue to operate without court supervision.

Talk to our team today to learn how Escalon can help take your company to the next level.

  • Expertise you can trust

    Our team is made up of seasoned professionals who bring years of industry experience to the table. You gain a trusted advisor who understands your business inside out.

  • Quality and consistency

    Say goodbye to the hassles of hiring, training and managing in-house finance teams. You will never have to worry about unexpected leave of absence or retraining new employees.

  • Scalability and Flexibility

    Whether you’re a small business or a global powerhouse, our solutions scale with your needs. We eliminate inefficiencies, reduce costs and help you focus on growing your business.

Contact Us Today!

Tap into the latest insights from experts in your industry

People Management & HR

2025 Employment Law Updates: What to Know

As we step into 2025, businesses across the country face several important updates in labor laws and employee benefits. Staying...

Read More
Startups

5 Signs Your Startup Needs an Outsourced CFO  

5 Signs Your Startup Needs an Outsourced CFO   Startups often operate with lean teams, but as they grow, financial complexity...

Read More
Leadership & Growth

CG Startups: How to Keep Costs Low While Scaling Operations 

Consumer Goods Startups: How to Keep Costs Low While Scaling Operations  Scaling a consumer goods startup requires a careful balancing...

Read More
Press Releases

Escalon Expands Its Reach: Full Stack Finance and Early Growth Join Forces with Industry Leader 

Escalon Expands Its Reach: Full Stack Finance and Early Growth Join Forces with Industry Leader  In a strategic move that...

Read More
Taxes

Delaware Annual Review: What Series A-C Startups Must Know to Stay Compliant 

Delaware Annual Review: What Series A-C Startups Must Know to Stay Compliant  For startups incorporated in Delaware, staying compliant is...

Read More
Taxes

Tax Planning for Startups: Preparing for Your First Tax Filing

Tax Planning for Startups: Preparing for Your First Tax Filing as a Growing Business  For many startups, the first major...

Read More
Taxes

Unlock Tax Savings with the R&D Tax Credit

As a startup, managing cash flow and minimizing expenses are critical to your business's survival and growth. One often-overlooked opportunity...

Read More
Accounting & Finance

1099 Compliance for Early Stage Startups

1099 Compliance for Early Stage Startups As your startup grows from seed funding to Series A, B, or C, you’ll...

Read More
Accounting & Finance

Meet the Experts at Escalon: Ankush Sharma

Welcome to our new series, Meet the Escalon Experts, where we introduce you to industry leaders shaping your business’s future....

Read More