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3 ways to reduce 'bad' debt

Q: We are a small computer service business with considerable credit card debt. What can we do to stop the creditors from charging 20 to 30 percent interest? -- Geri

A: Ah, a subject close to my heart! Back when I practiced law, my specialty was finances and I spent many an hour helping people get out of mostly credit card debt. I know how insidious it can be.

Credit cards can be both a blessing and a curse. On the positive side, they are a simple way to access cash. But the bad news is that ready capital does not come without a cost, namely, high interest rates. Even worse: The cards are often used for transient things like gasoline or business trips.

As such, credit card debt is often bad debt since you may end up with a lot of debt but not a lot to show for it.

But not all debt is bad debt. Some debt is OK. For example, you would probably consider that SBA loan that helped you start your business to be good debt, because 1) it is manageable, and 2) it moved your life forward.

Debt that has manageability and usefulness is what I call "good debt." A mortgage is an excellent debt, as is a student loan (usually). But a new car loan at 18 percent is not because you are taking on a high interest rate for an "asset" that will depreciate, not appreciate.

The cardinal rule then of business debt should be this: Do not take on any debt unless it helps grow your business and you have a realistic plan for paying it back in fairly short order.

Of course, that is often easier said than done. Financial management is not the strong suit for a lot of small business owners. That is one reason I think Microsoft Office Accounting 2008 is good asset for any business. It is an easy to use program that will help you handle on, and manage, your business finances.

Beyond that, the question is how can you rid yourself of excessive that credit card debt? There are three ways:

1. Do the credit card shuffle: If you have a card or cards with interest rates in the high teens, then the very first step is to transfer those balances onto cards with lower rates. Introductory teaser rates start around 5 percent or lower. Apply for some new cards and begin to shuffle your debt around. This will slow down dramatically the growth of your debt.

2. Negotiate: The first thing to do is to call and ask them nicely to lower your interest rate. Explain that you are a good customer and deserve a better rate. If they balk, ask them what they are charging new customers who have teaser rates and ask why a new customer is getting a better deal than a loyal customer like you. If they still resist, threaten to move your card debt to new cards.

No, your credit card companies will not want to negotiate with you, but you do have some leverage that may force their hand, namely, the tough economy. This helps because:

If the economy is tough, they especially do not want to lose you as a customer.

You may be surprised at how willing they are to dicker!

The final trick in your negotiation bag is to threaten bankruptcy. Once they hear that word, especially today, they may suddenly be much more willing to talk about renegotiating terms; 8 percent is much more palatable than nothing.

3. File for bankruptcy: This option is really only viable if the credit card debt is in your name personally (although it depends upon how much debt you have). Individuals can file Chapter 7 bankruptcy and wipe out unsecured debt (like credit card debt) in certain circumstances. Note though that Congress made filing Chapter 7 bankruptcy much more difficult in 2005.

Corporations that file Chapter 7 have to close their doors and assets are sold to pay off the creditors.

A Chapter 11 bankruptcy may be an option, too. Here, you file a plan of reorganization, usually paying less than 100 cents on the dollar, get your creditors to agree to that plan, and then keep the business open and pay off the agreed-upon debt, at a lower interest, over a few years.

Good luck!