Addressing the Debts Left Behind When a Franchise Fails
Closing a franchise can leave you as a franchisee with debts that build up over the life of your business. The loan used to buy or open the location may still be outstanding, along with credit card balances and taxes that went unpaid while your business was struggling. Some of those obligations belong to the company, but personal guarantees can leave you responsible for repayment after it closes.
There are several ways to address these debts, including debt consolidation, negotiated settlements, and bankruptcy. Choosing among those options begins by looking at the full amount owed and the agreements which created it. Reducing one payment will not necessarily resolve the other obligations left over from the franchise.
Choosing the right approach depends on which debts remain after the business closes, who is legally responsible for them, and whether you have the income or assets to repay creditors. Some franchisees may benefit from combining debts into a single payment, while others need to negotiate with creditors or consider bankruptcy. Understanding how each option works, and which obligations it can address, will help you evaluate a path toward debt relief.
How Franchise Debt Increases Beyond the Original Loan
Bankruptcy attorney Michael Wink has seen failed franchisees carrying several kinds of debt that began with an SBA or bank loan. He notes that franchisors often quickly introduce franchisees to lenders who are happy to loan them money for their new business. That same franchisor can also be quick to recommend poor financial strategies like MCAs and additional SBA loans if the franchise starts to struggle later. These accumulated financing arrangements remain obligations even if the franchise fails.
Current market trends show franchisee bankruptcies are rising sharply. 20–25% close within five years, and SBA defaults are at 7.2%–20%+. When franchises fail, credit cards often cover operating expenses that revenue no longer pays for, and unpaid taxes add obligations. Merchant cash advances (MCAs) can bring in more money, but the repayment withdrawals reduce the cash available for ongoing expenses. By the time the owner tries to consolidate debt, several creditors may have claims against the business or the owner.
Check Personal Guarantees Before Debt Consolidation
Before choosing debt consolidation, separate debts owed only by the company from debts you owe personally or have guaranteed. Also check lease and credit agreements, because closing a franchise location does not automatically end those obligations.
For example, an LLC or corporation does not shield you from a personal guarantee you signed. For SBA 7(a) financing, owners with at least a 20% stake generally must provide an unlimited personal guarantee. The SBA’s guarantee protects the lender and does not release the borrower or guarantor from repayment.
A debt relief consolidation proposal should account for these conditions. If a creditor agrees to a settlement, the written agreement needs to state which parties are being released. A release for the company alone could leave your personal liability unresolved.
Compare Debt Consolidation With Debt Settlement
Debt consolidation and debt settlement address business debt in different ways. Consolidation combines existing debts into a new loan, potentially lowering monthly payments without reducing the principal owed. Debt settlement involves negotiating with creditors to accept less than the outstanding balance.
For franchisees whose businesses have closed and whose income has declined, debt settlement may offer a more practical path to debt relief than taking on another loan. However, the types of debt involved, available funds, and potential personal liability all affect which options are appropriate.
It’s important to remember debt consolidation doesn’t remove all obligations. For example, you might consolidate credit card debt at a lower interest rate and still have the original SBA loan and tax balances to address. Any plan to consolidate debt also needs a reliable source for repayment, especially after the franchise’s revenue has stopped.
Clients searching for debt relief consolidation might instead benefit more from debt settlement, which seeks a creditor’s agreement to accept different payment terms or less than the full balance. One potential benefit of debt settlement is the ability to significantly reduce the amount owed, while a debt consolidation plan may only lower interest rates and monthly payments, not the total amount owed.
Keep Tax Debt Separate From Credit Card Debt and Loans
Unpaid payroll withholding deserves particular attention as you navigate unpaid business debt. The IRS can assess the Trust Fund Recovery Penalty against a person responsible for collecting or paying those taxes who willfully fails to do so. This creates personal exposure even when the employer is a corporation.
Trust fund taxes are generally not discharged in bankruptcy. Income taxes and sales taxes also need their own review, so keep the filed returns and agency notices with your debt records. Their treatment depends on the tax involved and the applicable rules; paying off credit cards does not resolve these balances.
Read Your MCA Agreement Before Changing Payments
Merchant cash advance agreements commonly authorize automatic withdrawals from a business account. Review each contract for its payment provisions and any personal guarantee or lien on business assets. A change to your credit card payments does not change the funder’s rights under a separate MCA agreement.
A proposed MCA settlement should spell out the payment amount and the release of any applicable guarantee or lien. Get legal advice before changing withdrawals or closing accounts, because those actions could trigger remedies which negatively impact you under the contract. Include all advances in the review, even if different funders are withdrawing from the same account.
Comparing Bankruptcy Options for Business and Owner
There are several bankruptcy remedies available for business debt, but you must know the differences.
- Chapter 7 provides for liquidation of nonexempt assets, but a corporation or LLC cannot receive a Chapter 7 discharge of its debts like individuals can. An eligible owner’s separate personal bankruptcy can address qualifying personal liability, including certain guaranteed business debts. Valid liens and debts excluded from discharge require separate attention.
- Chapter 11, including Subchapter V for eligible small businesses, offers a way to reorganize business debt. Its requirements and costs need to be weighed against the business’s ability to operate and fund a plan.
- Chapter 13 is available to eligible individuals, including some sole proprietors, rather than corporations or LLCs.
A qualified debt relief attorney like The Wink Law Firm can help you navigate these differences. Contact us today for professional, confidential advice about your business or franchise debt.
Gather Your Records Before Choosing a Debt Plan
Before you consolidate credit card debt or commit money to another program, assemble your complete creditor list with balances and any lawsuit notices. Include loan and franchise agreements, along with tax records and a list of assets owned by the business and by you personally.
Keep records of recent asset sales or transfers, too. Those details need to be included in a legal review of your business’s closure and any proposed bankruptcy. Your plan should address the original financing and your remaining personal obligations alongside any debts added while the franchise was struggling.
If you’re facing debt after closing a franchise or struggling to manage your business’s financial obligations, The Wink Law Firm can help you understand your options. Whether you have questions about outstanding SBA loans, or the differences between debt consolidation, settlement, and bankruptcy, our attorneys can review your circumstances and discuss possible next steps. Contact The Wink Law Firm or call (720) 523-0620 to discuss your business and franchisee debt questions.