Managing a Business Disaster

      A big customer can't pay because of big legal trouble now the cabinetmaker has to struggle to stay afloat. This long discussion is loaded with sympathetic insights. November 26, 2007

Question
I had one large no-pay customer that will end in a court battle. What can credit cards do to me no for no-pays? Can't a person keep one home (even if it's paid off), one new truck that's paid off? What about cash advances on credit cards? A friend told me to ask them to put it in collections and that would stop the interest. I have much unsecured credit left that I can use and have never been a deadbeat, but this collection from customer could take several years and then may only pay pennies on the dollar. For years I ran a cash only business and it was okay, but as time went by I got used to just charging gas at the pump, then paying off large amounts of debt as jobs paid or as houses that I had built sold off. I would drop 100K towards bills, which after several years, made creditors just up my credit, either hoping to trap me, or just believing that I would pay as always.

I don't really see me carrying this debt until I collect for this large job, which has been seized by the FTC because the builder had much in common with Enron. Due to sawdust and lacquer fumes, most would have quit before now. Should I apply for my disability and file bankruptcy?

If I can't pay my bills, what can they take? The truth is if the FTC would leave this builder alone, he probably would pay me, however his home is worth 2 million and my house is worth much less. All I can see is bad. There's no way I can pay the high interest on 50K and keep food on the table. I just came in to take a lunch break. It's 4 pm on Saturday and I'm working till midnight as it is. I'm too damned old to kill myself trying to work like I'm 25 years old. Can I stick my paid off house in my sister's name and it not be taken? People file bankruptcy all the time and laugh about it. Maybe I'll fake my death?

Forum Responses
(Business and Management Forum)
From contributor A:
If your house is paid for, why not take a home equity loan and pay off all of your outstanding debt? You can get a 6.5% home equity loan on the net in 10 minutes. Sorry about your situation. Unfortunately for you, the Republicans had a field day with the bankruptcy laws and your disability idea is a no go as well because half of America doesn't believe in welfare or entitlements.



From contributor K:
So sorry to hear about your situation. Gave me knots reading it. I'm not a lawyer, but I can tell you from seeing a family member go through bankruptcy, you are much better off trying to find a way to manage this debt. $50K seems like a lot, but believe me when I tell you, you have much more manageable options at your disposal. Bankruptcy is a much more aggravating process than I think you realize, but the lawyer made it sound so good to her (fresh start, blah-blah-blah). Expect to pay over $1000 in fees (and they will want it upfront; you are filing for bankruptcy after all) before all is said and done.

There are lawyer's fees, process fees, court costs, etc. that are involved, and being that you own your home (paid off), and have a truck that is paid off, I believe a judgment can be attached to your assets, and if I remember, there is a formula, whereby if you own your home (even with a mortgage), you may not even be able to file bankruptcy, as you are not insolvent (you have assets).

First things first. You need to take a look at your schedule and work in a couple of days off. Work related stress, coupled with this situation, makes it hard to put things into perspective. $50K, while a lot of money, is not the end of the world.

Second, immediately stop using your credit cards and go back to cash only. With your initial deposit, which should be at least 50%, buy 100% of your materials. This leaves the remaining amount as working capitol. It will also avoid being able to finish a job, because you can't rob Peter to pay Paul. Also, switch all your debt to the lowest interest credit card. Call them all to make them aware of the situation, and let them know of your plans, and ask for a skip payment (most credit cards will do this at least once a year without reporting to the credit agency).

Third, take a mortgage against your house for the $50K you need to cover this debt. The reason for this is, instead of looking at $1000-$2000 a month to cover the credit cards (I don't know what your interest rates are), you will be able to drastically reduce this to $300-$425 a month (6.5% - 9.0% interest rate), which is much more manageable and a lot less threatening to figure out how to come up with each month. This will be much easier to manage while you go through the courts to collect your debt. Add onto this fact that you will be able to deduct the interest each year off your taxes, and being that it is a loan to your business, you should also be able to deduct the principal off your earned income, as you are paying yourself back for the loan, also reducing your end of year taxes (check with your accountant on details and how to structure this). As business permits, you can also prepay this mortgage, thereby enhancing your credit position, instead of destroying it with bankruptcy or letting your credit cards go into collections (and the subsequent harassment you will be subject to - phone calls on a weekly basis from either the credit card companies or the collection companies - you don't need this stress and neither does your family). I'm sure your contract also stipulates the customer covering all collection costs that you also have something to use to get a judgment against the builder. This is not personal, but business. By the way, I would cancel all but two credit cards for emergency only and to maintain a positive credit rating.

Another alternative is, if the job was completed and signed off on, and you are just waiting for payment, you can also look into factoring the balance of the job. A factor company pays you about 70-80% of the balance, and the remaining 20-30% when they collect the balance, minus the fee they keep for collecting the debt. I'm not sure if this applies in your situation, but definitely worth looking into, as $10K of debt is much easier to deal with than $50K of debt.

In addition, check into Account Receivable Insurance for large jobs like this, so you can avoid being burned like this.

Finally, you are not the first or the last person who has had to deal with a situation like this... but, worst case scenario, you take a mortgage to pay off the credit cards, switch to cash only business again, and begin life again. If you ask me, the $300-$425 monthly mortgage (and one creditor/invoice to deal with which you can pay off early as business permits) would be much less stress to deal with than managing a bunch of credit card payments over a $1000 month, at more than twice the interest rate, along with late fees, over the limit fees, harassing phone calls, etc., or worse yet, filing bankruptcy (assuming you even qualify for this option) and destroying your credit.

You will also be able to hold your head high knowing that you didn't let the situation get the best of you, instead of having a negative situation spiral out of control, and having it being reinforced each week by creditors constantly calling looking for money. For $300-$425 a month, you can also avoid passing this aggravation off onto your family (wife, kids, your sister). In any case, you're not as bad off as you think, and I wish you all the best.



From contributor D:
I have no good financial advice. I do want to say that I have been burned on $85,000 in a similar situation. This is hard to swallow for a three man shop. I remember feeling hopeless, as it seems you do. Hang in there. Things get better with good decisions and research. Extreme frustration and anger don't help solve the problem. Sorry about your situation, but remember - bad things always pass and new opportunities arise.


From contributor W:
In most states they cannot take your home from you. It has something to do with homesteaders exemptions, I think. Also, they would be hard pressed to get your primary mode of transportation from you because without it, how do you make money? I think the poster that said to get a refinance on your home is correct. A 50 grand note would make your payments around 500 a month. Maybe less.


From contributor G:
I'm really sorry to hear about your situation. I'm no expert at finance by any means, but I've read a book by Suze Orzman. She says specifically in her book to never obtain an equity loan off of your home to pay off credit card debt... This is very risky. You see, credit card debt is unsecured, like you stated above. Meaning they can't come and take anything. But if you do a home equity, and can't make the payments, you've now opened the door for them to take your home. A good first step would be to talk to Consumer Credit Counseling Services or the like. Also, call the card companies; if you've been a good client, they may lower your APR, and work with you. I've had mine lowered, so I know it can be done. Be careful before you make that first move.


From contributor M:
Sorry to hear of your situation. I am sure this is very frustrating. It sounds like contributor K's advice is good, based on his family member's experience. However, if I were you, I would contact my accountant for advice. They should be able to advise you with a plan specific to your exact needs, based on the info they have known about you and your business over the years. A good accountant should be able to come up with a plan that will make you feel confident about getting out of this situation, and that will be most important for you to keep motivated to working out of this.


From contributor W:
I am just about through paying off one of those larger-than-life debts that can sink your heart and your business if you let it. You can generate a profit, it seems, so I think you ought to stick with it and in 2 or 3 years it will be behind you and you can get back to normal.


From the original questioner:
I can't decide on the taking equity from my home. Last night as I tossed and turned it seemed like the thing to do. I believe that credit card debt is unsecured and therefore they can't put a lien on your home. I have been told if you file homestead exemption, even the IRS can't take the place that you live in. I always try my hardest to do the right thing, I just hate the thought of tying up my children's home to pay off some plastic and then find out that I could have sent $200.00 a month. I have never been late on anything in 10 years and if I did allow the cards to enter collection that would end this good credit thing. What makes it suck is that whatever I decide to do, I need to be damned sure it's what I want. Without credit cards, ordering online will suck. I don't even know how I would pay for my internet service.

I talked with a friend that is a mortgage broker and his sound advice was that there are about 43 different credit card underwriters in the US using 500 different names. He said get them all, max them out, then wait a year and file bankruptcy. He swears they can't and won't do anything. He swears that's what the people do that live so much better than we do making half of the money we make. He said they do it every 10 years. I have always believed I was one of the good guys, but I don't see how I could stick the credit card companies and be any different than the people that have stuck it to me. Where are all of the retired lawyers turned cabinetmakers when I need them?



From contributor K:
If your concern is being able to charge something online or paying for internet service, you can accomplish the same thing with a debit card. The only difference is that instead of waiting for a bill to pay, it would come directly out of your account, and one less thing for you to worry about. But even if you do get a mortgage (not an equity loan, as they are higher in interest, and more upfront fees), I would still hold onto 2 credit cards for emergency use and to maintain the good credit you've worked hard to keep over the last decade.

As far as the advice from your friend, the mortgage broker, I can't believe he would advocate that his friend, let alone anyone else, steal from someone else like that... You don't come across as someone who would do that for real, and your gut on that one is dead on.

No, I'm not a lawyer, or an accountant, but I have been in your shoes to one degree or another, and I have seen other shop owners and family members go through it.

As far as Consumer Counseling Services go, even though they advertise "not for profit," they charge monthly for this service, and it is a mark on your credit report.

I agree with others that you can work through this. After 25 years, it's obvious you can make money. The mortgage would just alleviate the headaches involved in managing the debt amount and bringing it down to its simplest form at the lowest interest rate, all with the advantage of tax write-offs. After talking to your accountant on how to structure this, he might even have some alternative ideas. Although, I guess if I were mortgage free, I would be trying to avoid this too...

If you want legal advice, you could also join one of those co-op legal programs for $10-$25 month, and you can ask all the questions you want. You could also get into contact with your local SCORE chapter, and they might be able to provide some direction.



From contributor U:
Sorry to hear of your situation. To quote Dave Ramsey (financial talk show host with New York Times best sellers), "Stop taking advice from broke people." I'm referring to your mortgage broker and others that advocate letting cards go into collections and filing bankruptcy (not the people who responded to your post here).

The IRS can take your home. First they will put a tax lien on the property that will red flag you for any legit loans. Avoid the problems with the IRS at any costs.

Second, credit cards are considered unsecured debt, as no asset was used as collateral. However, after a long time of non-payment, the credit card companies will sue you and win a judgment. At that time your home, vehicle, wages, etc. are fair game. Also, late fees and interest continue to build and 50K can turn into 75 or 80K easily.

Third: You owe the money and have a moral obligation to pay it. However, before paying a dime on credit cards, take care of the basics: shelter, food, utilities, transportation. Then you can work through the debts.

You can't borrow your way out of debt. Taking a mortgage on your home and continuing to use credit cards will most likely result in the same situation down the road, but with less equity in your home. If you're done with credit and are now paying cash for everything like the old days, restructure your debt with a short mortgage on the house. Sorry if this sounds harsh.



From the original questioner:
After a lot of good sound feedback here and pondering it all day, I don't see how I can raise my children to have the highest of morals and file bankruptcy on bills that I owe. Honesty is a thing that is priceless, so I believe I will take equity out my home. It's not the end of the world; most people do have a house mortgage, so why do I feel like a failure? And I do like my good credit and without it, I will pay more for many things like insurance. Before my credit got good I could not even get a little 10K contractor's license bond; they wouldn't sell me one with 10K cash in my pocket. It was very hard to establish credit being self employed, and I agree I can't borrow my way out of debt. It sure sucks to have to pay a house payment for plywood, tools and electricity that was used in the past. It sucks, it sucks, it just really sucks, but I may collect from this job one day.


From contributor O:
You need to talk to a lawyer and to your contractor's bank. Many times the contractor's bank will pay subs directly to keep the property from having a lien. A collections company may be able to help. You might be able to settle for a percentage on the dollar just to get some money from this guy. Sometimes some is better than none. The main thing is to act now. The longer you wait to get this money, the harder it will be. Try to use any angle or method you can think of to collect. What about getting paid by the property owner? If the property owner is a bank, then go to them. You need to exhaust every avenue before you give it up to the legal process.


From contributor I:
Two things: file that lien, get all your numbers together (debt, income, assets, etc.) and call Dave Ramsey. You can find the number on the internet. I promise you will feel better after talking with him.


From contributor T:
I had a similar situation a number of years ago, when the DEA locked up one of my customers and seized his business. We contacted the DEA and pleaded our case to let them release our funds to us (small business and all that) and they eventually did. We had to wait a couple of months, but it wasn't the end of the world.


From the original questioner:
This builder is great as far as builders go. He had an appraiser and realtor in his pocket inflating the home's value, selling them like hot cakes, but when the mortgage company got one back they claimed that they got stuck. They really were selling for the same as many homes of the same size in same area.

Whenever I needed a draw on a job, this man just cut me a check on the spot, no waiting a single minute on your money and never bitched about the price. He knew a vast amount of every trade, knew good work when he saw it, and absolutely no illegals used for any labor. It was a good run while it lasted. He has denied any wrongdoing, but appraiser and realtor have fingered the builder as the ringleader, 4 500K homes 80% completed where seized, 2 with cabinets installed and a full set in my shop. I am sure I could bail on the credit cards but it sure would wreck years of hard work and make the next 7-10 years harder, but harder than paying off 50K? Time will tell.



From contributor O:
So the guy is going up the creek. Have you talked to the bank or lender that has seized the property? They may be responsible for paying the subs. Do some asking around. I am sure that there are other subs working on these houses that are in the same boat as you. See what info you can cull from them. If it goes to the lawyers, you will get little to nothing except their big bills and aggravation.


From the original questioner:
It's the Federal Trade Commission, the United States government. The bank has the money to pay subs and complete the houses, but they ain't giving up a dime. It could take years for this to go to court. Word is if he's found guilty, the houses will be sold for auction. Whatever they bring will be divided among bank first then subs later, pennies on the dollar.


From contributor B:
I don't know much about the law as far as these things are concerned, but as far as regular resells, the house has to have a free and clear title before it can be sold. Can you put a lien on the house for your work and even if the bank does auction it off, the lien would have to be settled before a clear title is received...?


From the original questioner:
I have a lien just as other subs, but bank has dibs on first fruits. I am no match for bank or government, but I'm okay. If I get half, that's more than expected. I will work past it.


From contributor C:
Get on the ball; make sure your name is the first on that mechanic's lien so that if he goes under, you are the first to be paid behind the IRS. Take him to court and bleed him for all hes worth; someone with a two million dollar home is going to have a good lawyer, so this is what I propose. Visit his lawyer every other day requesting some kind of information. He is required by law to give it to you and every time you do this, that lawyer is charging him for an hour. I know this is really not doing much for you, but this tactic really brings the big guy down to the same level as the little guy and might give him some incentive to settle.


From the original questioner:
This guy is wealthy for sure, but the government has all his money locked down. I don't think he is a sorry ass; it depends on what the government wants from him. They may force the sell of all his stuff; it's mortgage fraud of about 10% of the home's value, which he didn't pocket because he paid everyone far better than other builders, so I guess he was screwing the lenders so he could afford to build a better home and pay his subs decent.

I could blame him for being a crook, but I'm the one that asked for his work; he didn't track me down and ask me to build his cabinets. I have always gotten paid and became lax in deposits and contracts with this builder, much like my creditors have with me. It just now may be Ronald Reagan's trickle down economics theory. It will always land on the poor man's back. The only way to avoid this is to not be poor. Working man pays the bill.



From contributor X:
How long can you write this off as a tax loss with the IRS?


From the original questioner:
3 years as far as I know.


From contributor N:
Since you have a lot of equity in your home, you'll only be able to file for Chapter 11. This means you'll have to pay everything back, but at least the phone will stop ringing for now. Rather than making payments directly to your creditors, you'd be making payments to a bankruptcy trustee, and he'd be making the disbursements for you. Typically, repayment plans can take up to 5 years.

You can visit a lawyer and get a free consultation to learn more. It's not that tough to file yourself. It's just a matter of getting the forms from a legal stationery store, and showing up when your hearing comes up.

The down side to this is your credit will be shot for 7 years (that's how long bankruptcy remains on your credit report). Of course, your credit is probably not in that great of shape now if you're not making payments. If you're able to make a profit if this problem were to go away, I'd definitely go the home equity loan route.



From contributor L:
I've said it for years; do not run your business on credit. I do not even have a credit card. You don't need one, either. I use a debit Visa for everything. Last December someone posted here saying they lost their business due to one nonpaying customer. Went from something like 25 employees to none, in a year. Do not take a loan against your home! You can't borrow your way out of debt. All you do is transfer debt.

Read a few Dave Ramsey books. Cut any expenses you have. Keep the rent, lights and suppliers paid. From today forward, pay them before the truck hits the door to unload. Call the people you owe money to and explain the situation. Tell them you will pay them as you can.

Each month, pay the basic bills you need to pay to keep in business. Pay yourself the minimum you need to keep your personal affairs in order. No vacations. No new truck. All money that can stay in the business needs to stay in the business.

Make a list of people you owe money to, smallest debt to largest debt. Pay the minimums on everything. Any extra money goes to the smallest debt. When you get that smallest debt paid off, go to the next smallest, pay all minimums, and any extra goes to that debt. Work your way out of debt.

It makes more money sense to pay off the highest interest first, but you really need to establish a feeling of success. That's why you pay the smallest debt. Success feels good and you now have one down. Now move on to the next smallest debt.

You have an opportunity to make money that most people don't have. You have a marketable skill. Look for labor only jobs. Get a book called "Guerilla Marketing" and read it. Go advertise in the ritzy communities to install trim on the weekends. Crown molding, chair rail, anything.

I made $500 one afternoon installing an attic floor above someone's garage because no one else would do it. I made $850 teaching a class this weekend in basic cabinetmaking. You can make money in ways you have not thought of. You could do these things. You can do lots of other things.

You need to pay as agreed. You can get out of debt. As long as you are making the minimum payments, the card companies can do nothing to you. But if you are currently behind with anyone, you need to call them and talk to them. Maybe you can talk them into giving you a lower interest rate. They want to be paid as much as you want to pay them. Most of them will work with you. But it's really up to you. This is a tough spot in your career. It will pass. The more uncomfortable you make it, the quicker you will get it over with. The quicker it gets over wit,h the quicker you get to start making money for yourself again. The more uncomfortable, the more you will take steps in the future to not get in this situation again.



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