Negative net worth, deep in debt, struggling business...

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Negative net worth, deep in debt, struggling business...

Tim Kersting
Hayward, CA · Member since 2015 · 21 posts · 11 votes

hello all,

I'm looking for some advice.... Why else would I be starting such a threat... LOL.

Basically, as the subject line indicates, my business is not producing as much as it needs to financially. For the last five years or so our efforts to pay down debt have been mildly successful, but it seems as though we've been borrowing from Peter to pay Paul. We had what appeared to be a really good year for the business, but ended up not paying enough in quarterly taxes to the IRS... Fast forward to now... In addition to unsecured debt payments we now have a pretty substantial monthly payment going to the IRS.

As far as numbers go; we are looking at owing a sum of about $68,000 in total. This includes about 17,000 to the IRS, a loan for a truck for business with a balance of about $12,000 and the rest is mostly credit card debt. I do have a few thousand in IRA accounts and emergency savings. And I'm a renter...

I've been exploring some ways to jump start getting this stuff paid down. Because I am a sole proprietor with no employees I can only take on so much more work to MAKE more money, so that's not really an option here, or at least it has its limitations....me. I have looked into possibly selling off a piece of my business that isn't making as much as other parts. By my estimation I can sell a certain piece for about $18,000 which translates to about $11,500 after taxes. 

This seems to be a pretty promising idea, but here's where it gets a little tricky for me... where would be the best place to direct that sum of money? I already don't have the debt to income ratio to even think about real estate at this time... Let alone when I sell off that piece of my business my debt to income on paper will be even worse.

 Do I take do I take the approach of paying off the highest interest first? Or is it better to pay off total balances?

I know this isn't exactly a real estate question or concern... But eventually that is my goal to be able to pick up at least one multi-family property that I can house hack.

I got into business like many others ignorant of the ins and outs of taxes and accounting. I take full responsibility for the debt that I owe, and I'm working my very hardest to get it paid off... It just seems like there's something that I'm not seeing. Unfortunately, I can't afford to pay an accountant so the best I can do is reach out to smart people on BP and gather as much of a working knowledge as I work in harmony with my goals.

Any help, advise, or helpful suggestions are very much appreciated.

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Matt Vogt
Investor · LaGrange GA · Member since 2014 · 121 posts · 55 votes
10y

Maybe a good approach would be starting by breaking down the debt into groupings to show the interest rates, total debt, and minimum monthly payment. Build a little spreadsheet to show all of this, it will help you attack the situation in the most effective way. Feel free to PM me if you need help with this, I'd be more than happy to throw something together for you. 

Additionally, I would find out what your raw personal expenses are in order to survive (Rent, food, insurance etc). Then I would work on  finding your base revenue (weekly cleanings etc) that are pretty locked in and don't fluctuate. I'd then see how much is leftover to service the debt. 

I cleaned pools for 2 years during and after college, it was definitely lucrative ($50-100/hr with a lot of cash payments). It's pretty cool that you can do that year-round in CA. Ours was only a 4 month season or so in NY. 

Best approach is paying the highest interest debt first (after monthly servicing), although I'd be looking at 0% balance transfers etc to help you eliminate debt. 

Additionally, switching to a mainly cash basis for your expenses should help you manage your money a bit better while not increasing credit balances. Find out your base expenses and take that much out in cash each week, and hold yourself to the budget. 

Best of luck, it will take a lot of discipline.

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    10y

    Man, that's a boatload of questions. 

    Because unsecured debt usually entails minimum payments, I am a fan of the "pay off the fastest possible one first" advice than going the interest rate, assuming all of the rates are reasonably close together. Not only does it build confidence, but it usually provides some much-needed cash-flow relief by eliminating another minimum. 

    $68k is really not that much money. Even a part-time job would get you $10-20k on the side. I think your bigger question needs to be how profitable is the business vs. just selling/shutting down and going to work for someone else. What is the nature of the business? 

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  • Jassem A.
    Investor · PA · Member since 2013 · 1k+ posts · 602 votes
    10y

    Could put the consumer debt into a debt reduction plan or file bankrupcty and find something that pays better

    0Reply
  • Samantha Klein
    Investor · Monroe, WI · Member since 2015 · 691 posts · 610 votes
    10y

    If you owe 17K to the IRS, your business must have had a pretty good year and I would imagine you should have paid off the excess tax you owed right away when you found out you didn't pay enough in. 

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  • Jeff F.
    Rental Property Investor · WY · Member since 2016 · 243 posts · 221 votes
    10y

    Read the total money makeover by dave ramsey, and follow the 7 steps. Sounds like you already have step 1 completed (an emergency fund).

    Next step is paying off debt - when I was in your situation (55k debt) I started with the lowest balance first and it worked well. It took me 3 years to pay it all off. Good luck, and get used to telling yourself "no, you dont need that"

    2Reply
  • Daniel Chang
    Professional · Riverside, CA · Member since 2009 · 254 posts · 273 votes
    10y

    Starting with lowest balance debt first is for the psychologically weak aka Dave Ramsay style.   Well, that may be a bit harsh, and it's better than not doing anything I suppose.  If you serious about paying down debt, pay the highest interest rate first.  Your debt would decrease faster than the Dave Ramsay style.  

    You give a lot of information about yourself except for "your business".  I agree with others, it's time to decide between your business and employment.  It doesn't sound like your business is cutting it.  

    2Reply
  • Tim Kersting
    OP
    Hayward, CA · Member since 2015 · 21 posts · 11 votes
    10y

    thanks all.

    Like I said, it's kind of a borrow from Peter to pay Paul situation. I should have held the money to pay the taxes, but I was a bit to agresive  with the credit cards so I didn't have the money come tax time.

    Oh, so the business is a swimming pool service/repair business. It's a decent business, wouldn't be so bad if I didn't have all this debt getting in my way. ;0P 

    Any how...thanks again. 

    0Reply
  • Matt Vogt
    Investor · LaGrange GA · Member since 2014 · 121 posts · 55 votes
    10y

    Maybe a good approach would be starting by breaking down the debt into groupings to show the interest rates, total debt, and minimum monthly payment. Build a little spreadsheet to show all of this, it will help you attack the situation in the most effective way. Feel free to PM me if you need help with this, I'd be more than happy to throw something together for you. 

    Additionally, I would find out what your raw personal expenses are in order to survive (Rent, food, insurance etc). Then I would work on  finding your base revenue (weekly cleanings etc) that are pretty locked in and don't fluctuate. I'd then see how much is leftover to service the debt. 

    I cleaned pools for 2 years during and after college, it was definitely lucrative ($50-100/hr with a lot of cash payments). It's pretty cool that you can do that year-round in CA. Ours was only a 4 month season or so in NY. 

    Best approach is paying the highest interest debt first (after monthly servicing), although I'd be looking at 0% balance transfers etc to help you eliminate debt. 

    Additionally, switching to a mainly cash basis for your expenses should help you manage your money a bit better while not increasing credit balances. Find out your base expenses and take that much out in cash each week, and hold yourself to the budget. 

    Best of luck, it will take a lot of discipline.

    3Reply
  • Trevor Ewen
    Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
    10y

    @Tim Kersting

    @Matt Vogt has the right idea about assessing your monthly expenses. As a few people mentioned, owing taxes usually means a good year for business. And your business doesn't sound speculative or low margin (startup or restaurant) respectively. Seems like a place where you can actually do pretty well, all told.

    Getting a grip on personal finance is step 0 in the real-estate process. Some people skip this step and it comes back much later in a big way. I wrote an article to this effect on the Bigger Pockets blog recently:  here.

    People who live in CA and other pricey markets like my own often have lifestyle costs that run completely out of control. It's scary when people make $200k / year live hand to mouth, but it happens all the time in these places. It's nothing to be ashamed of, but some good old cost cutting is often what people need to get the job done. When there's a specific goal like paying down debt, you can double down and really focus, as if it becomes your job. Here are some common-sense and innovative things I have seen, heard, or done myself to cut down on expenses:

    - Downsize the apartment/home. Could you pay less rent? Maybe move nearby to a less pricey / popular area.

    - Downsize on automobiles, how many cars do you have? Do you need all of them?

    - Lose / sell off some hobbies. I'm a musician, so I know about expensive purchases. I don't get a chance to play much more since I am busy with my business and work. As much as those things are valuable, it may be good to go minimal and cut off the accessories for a bit. Selling them cleans your home and mind. It also puts a little extra cash in your pocket.

    - Quit drinking or going out to eat till debts are paid down. Just force yourself to go sober for a bit.

    - Quit some subscriptions and get the money right into your debt. Don't even think of using it for anything else.

    - Look at business overhead and operating costs, anything right now that could be temporarily removed? Office space, vehicles, perks?

    These are all pretty standard ideas you see all over the personal finance world. Nothing really new here, but lifestyle costs are a factor in every debt breakdown I see. There is no easy button for this one.

    0Reply
  • Ronan M.Pro Member
    Rental Property Investor · Chicago, IL · Member since 2015 · 352 posts · 281 votes
    10y

    "Unfortunately, I can't afford to pay an accountant"

    @Tim Kersting   Given the situation you have outlined I think you can't afford NOT to have an accountant. If you are going it alone against the IRS the odds are stacked against you.

    Before RE I had a small business doing $500K per year and I never had a tax burden close to $17K.  You must at some stage have had a decent business for the IRS to hitting you with such penalties. You should have at lease once or twice a year touched base with a CPA. Even to do your annual returns.....$1000 maybe.

    My humble advice...forget doing spreadsheets of your debt and making fancy columns and the like...I hazard a guess you are not very good at that anyway (no offence just taking this assumption from your own post)

    Get yourself a good accountant asap. It might be the best money you ever spend. With the IRS et al...he/she might even save you some money.

    Best of luck.

    0Reply
  • Tim Kersting
    OP
    Hayward, CA · Member since 2015 · 21 posts · 11 votes
    10y

    @Matt Vogt Thanks for the reinforcement! I've actually built out a spreadsheet that shows all the info you suggest....so I'm glad I at least (on paper) doing something right! Thanks for the offer of assistance, its much appreciated. and yes, pools can be lucrative, my problem is that in the beginning I had no idea how to manage the business end of things, because i jump into everything head first...now that i know how to manage it, im having trouble  because i dont have the financial rescources to juggle it all. (thus the borrow from peter to pay paul reference)

    @Trevor Ewen  Thank you as well, I'm glad I've at least done 75% of your checklist there.

    -Rents low

    -1 car note for the biz...other car is paid off

    - don't have time for hobbies, so I've sold off most of them (drums...bummer)

    - don't drink a lot, but I could probably cut back....don't smoke(wohoo!!)

    - working on the overhead....I operate out of the house, so im about as cheap as i can get in that regard.

    Its mainly paying for 10-12 years of bad personal credit management. Grew up low-mid income and didnt pay enough attention to parents training on how to use credit.

    Thank you guys for the encouragement.

    0Reply
  • Trevor Ewen
    Rental Property Investor · Weehawken, NJ · Member since 2014 · 1k+ posts · 704 votes
    10y

    @Tim Kersting

    You're on your way then. There are likely to be a few slow years in there, but remember getting rid of bad debt is more surefire than any real estate investment I've heard of.

    Good luck. Reach out if you need anything.

    1Reply
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