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The construction industry may be in growth mode now, but many contractors lost substantial business and took on heavy debt during the recent recession. If you’re looking for debt relief and thinking about debt restructuring, construction CPA Doeren Mayhew offers information to consider.
No one wants to think too much about debt, but it’s important to learn the rules. 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:
When tax season arrives and you receive your 1099C, you’ll need to report the canceled debt as additional taxable income. Lenders may also issue a 1099A, 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 1099C instead of 1099A. 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 1099C or discharged in bankruptcy, you still owe the money.
Another debt restructuring strategy is a debt-for-equity exchange, which is when a company 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.
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, emails 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.
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. Your construction CPA can help you determine the best mix of debt reductions and payment term extensions for your construction company.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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