Non-Traditional Unsecured Debts: Commercial Debts

The past few years have been tough for small businesses. Many entrepreneurs had to endure weeks or months of being closed during the worst of the pandemic in 2020. Some businesses haven't built back the customer base they had before the start of the crisis. Currently, the rising prices of gas and many essential goods have increased costs for many businesses, and now interest rates are rising, making debt more expensive in many cases.

If you've had to close your business due to the challenges and upheavals of recent years, you're not alone. Some studies indicate that as many as one-third of small businesses in the US, and nearly 40% of California small businesses, closed after the pandemic. Some may have reopened. However, the fact remains that many small businesses in the country didn't survive the COVID upheaval.

Even before the pandemic hit, many small businesses in recent years have been forced to close due to economic and demographic changes that impacted their business, leaving them without enough resources to pay all the remaining bills. Business owners in crises often must choose between the competing priorities as to which obligations get paid and which get put further off. The result, in many cases, is ongoing commercial debt. Many business owners who must shut down their operations are left responsible for unpaid amounts like a space lease or a rotating line of credit that may have helped to cover expenses.

Two main types of debt are secured and unsecured. The names indicate the legal status, with secured debt attached to valuable items like real estate or commercial equipment that helps secure loan repayment. With a secured loan, the creditor can move quickly to take possession of the collateral property, sell it, and use the money to apply to the outstanding loan balance. On the other hand, unsecured debt has no collateral attached, so the creditor can't just take some property to sell to get the money they claim is due on the loan.

Commercial debts are often unsecured, so no collateral is attached to the obligation that the bank or creditor can seize to pay down the balance owed. Unlike secured debts, where the lender can take possession of business equipment or vehicles to sell and cover some or all the outstanding money due, unsecured debts present a challenge for those trying to collect them. This is part of why unsecured debt usually costs more in fees and higher interest rates than secured debt because the collateral helps the lender feel confident that they will get all, or at least some, of their money back.

If you have unpaid commercial debts, you are probably aware of creditors and collection agencies' efforts to get payment. There may be frequent telephone calls, email messages, and contact by mail reminding you of the debt. If you cannot work out payment options that can satisfy them, the next step may be a lawsuit.

It is usually only through court action that a commercial creditor can convert an unsecured debt, like back due amounts on a commercial space lease, into a judgment. With a judgment against you (and possibly the business, if it has assets worth pursuing), a creditor can pursue a lien on some property, such as real estate or equipment, to eventually try to take ownership of the property to collect the money they claim is due.

If you believe your business will go on and it can thrive in the space where you've been doing business, then it might be best to talk to your landlord about payment options. Depending on the real estate market and other factors unique to your situation, the landlord may agree to accept the past due amount over time if you can continue making monthly rental payments and paying the back rent.

If there is still time left on the lease agreement–say you have a 12-month lease agreement for your business premises and you realize that you will be closing your business halfway through the year—you will still owe the remainder of the lease amount in most cases. The landlord must try to minimize their losses, called “mitigation of damages,” meaning they must do their best to get another tenant to pay as soon as possible for the space you've vacated.

Suppose you know you will be moving out before the end of the lease. In that case, you might be able to help reduce the total amount you owe on the full lease by finding a new tenant who will take over the space when you leave. Many landlords appreciate the time and effort savings on their behalf and will work with you to reduce the total amount due.

When you owe back rent on your commercial property, usually the property owner's first action is to take action to evict you if you haven't already vacated the premises. The legal process is called an unlawful detainer action, starting with a three-day notice to pay the rent due or vacate the location.

Suppose you realize that your business at that location is done and quickly move out, but money remains due for back rent. As an unsecured debt in most cases, your former landlord at first has only the options available to other debt collectors, such as phone calls and letters to try to collect the money. But if the landlord can prove that you owe money per the agreement that wasn't paid, they may have a strong case in court to get a judgment against you for the amount due. In that case, the landlord can start a court action to collect the amount claimed due.

The skilled legal team at Fitzgerald & Campbell, APLC has been helping Californians resolve debt problems since 1992. We have helped our clients save millions of dollars of debt. Our experienced and caring legal experts understand that debt problems can feel overwhelming and stressful. We work exclusively to help resolve consumer and small business debt challenges.

We look forward to the chance to apply our detailed legal knowledge and skills to represent you as you work to get control of your finances. Reach out to speak to an attorney today to see how we may be able to help you eliminate your unsecured debts. Call us at (844) 431-3851 or contact us online.