Managing debt helps protect your construction business
Times are good in Northeast Ohio right now for construction companies and contractors. However it wasn’t all that long ago the industry was struggling, so it’s important to know the rules to effectively manage your company’s debt and protect its future.
The rules
No one wants to think too much about debt, but knowledge is an important management tool to have. For example, if a creditor loses hope of collecting an outstanding debt, it may cancel your debt and report the amount to the IRS using Form 1099-C. This form helps determine:
- Whether the debtor is personally liable for the debt,
- whether the debt was canceled in a bankruptcy proceeding, and
- the fair market value of any property that may be foreclosed on because of the debt cancellation.
When tax season arrives and you receive your 1099-C, you’ll need to report the canceled debt as additional taxable income. Lenders may also issue a 1099-A, which is required if a debtor stops paying or abandons its debt. But if the debt is canceled, the lender can include information regarding the abandonment on Form 1099-C instead of 1099-A. The lender must send a copy of the form to the borrower by Jan. 31 of the year after the debt is canceled.
People often confuse “canceled” debt with “charged off” or “written off” debt. A “charge-off” means the creditor has deleted your account from its active books and has likely sent the account for collection or sold the account to a debt buyer. Keep in mind that a charge-off on your credit report doesn’t mean you don’t have to pay the debt. Unless the debt was canceled with a 1099-C or discharged in bankruptcy, you still owe the money.
Swap debt for equity
One strategy to consider is a debt-for-equity exchange, which is when a business replaces its debt with a percentage of ownership in the business. This solution often occurs when a company is unable to repay its creditors without going bankrupt.
Bear in mind, such a swap will likely mean a drastic restructuring of your construction business and may even result in a surrender of business leadership as creditors gain more control over operations. The advantage, however, is the prospect of future growth: Debt-for-equity frees up money that you would have previously spent on debt repayment.
Work with creditors
Coming to a debt agreement with creditors isn’t always a possibility. But, if you have strong working relationships with one or more of these parties, it’s at least worth a try. An informal debt agreement may enable you to freeze accrued interest on your debt and give you some welcome relief from the onslaught of letters, e-mails and calls from the creditor in question.
This option is also preferable because it does less damage to your construction company’s credit rating than bankruptcy would. In addition, payments are often simpler, because, depending on the nature of the agreement, you may be able to pay a one-time sum to the creditor rather than keep up with multiple repayments.
If you plan to take this route, it’s generally best to engage an experienced debt agreement administrator to help negotiate and prepare the arrangement.
Get creative
When a contractor falls into major debt, filing for bankruptcy may seem like the easiest or only option. Yet there may be a variety of ways to creatively restructure your financial obligations to your advantage — and we’ve mentioned only a couple of them here.
The best resource to help manage your financial health in good times and bad is a financial advisor. Contact Tony Constantine, Ciuni & Panichi, Inc. Partner in the Construction and Real Estate Group, at 216-831-7171 or tconstantine@cp-advisors.com to learn how your company can benefit.
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