Ask HN: My startup failed. $9k in debt and need to pay most of it in 12 days.

Note something about collections: Collections agencies are not a party to a debt and thus they have NO LEAGAL RIGHTS, and further they do NOT have the right to "destroy" your credit, or even to affect your credit. You owe money to the original party, and you only have to deal with the original party. You need to protect your credit by sending a "Cease and desist" to any and every collection agency that writes you about any debt. Send this by registered mail, return reciept as they are notorious about committing perjury and claiming they never received such letters. When you have proof, you will have them on the legal hook if they report the debt to a credit reporting agency or participate in any collection activities, including claling you, after recieving the C&D. You can find forms for these online... Here, I'll attach one below.

The original creditor maintains all rights, and they can sue you, or they can contact you, or attempt to work out an arrangment. By turning it over to a collection agency they have indicated that they don't think they can collect and are writing it off, which is fine as this is one of their options. But don't let your credit be hurt. Send the C&D to the collection agency, and they are prevented from reporting the debt on your credit report. Often this is also effective in gettign the original creidtor to actually talk to you so that you can work out payment terms.... and since they already wrote off the debt they should be willing to accept good payment terms (like 10 years, no interest, monthly payments starting in 6 months after you send them a $200 initial good faith payment... that's what I'd propose.)

Collection Agencies pretend like they have the authority and will pretend like they can sue you, they often pretend like they are law offices.... but remember their job is basically to intimidate you or trick you into paying, anything to get you to send a payment. But under the law, you have no contract with them, you never agreed to deal with them, and they have no legal rights. The original creditor can sue you, but if they were going to do that, they wouldn't have turned it over to a collection agency in the first place (Which keeps a large chunk of what they collect.)

So, don't let your credit be damaged-- be on the ball with the C&D and you can not only keep collections from harassing you, but force any creditor who really wants their money to work with you on terms.

[Your Name] [Your Mailing Address] [Your City/State/Zip]

Certified Mail, Return Receipt Requested # [Insert the Certified Mail Receipt Number here]

[Insert Date of Mailing]

[Insert name of collection agent, if available] [Insert name of collection agency] [Insert address of collection agency] [Insert City/State/Zip of collection agency]

REF: Account # [Insert either the original account number or the collection agency's account reference number here]

Dear [Insert name of debt collector calling--if available--here]:

1. You are hereby notified under provisions of Public Laws 104-208, also known as the Fair Debt Collection Practices Act, that your services are no longer desired.

2. You and your organization must CEASE & DESIST all attempts to collect the above debt. Failure to comply with this law will result in my immediately filing a complaint with the Federal Trade Commission and the [Insert your home state here] Attorney General's office. I will pursue all criminal and civil claims against you and your company.

3. Let this letter also serve as your warning that I may utilize telephone recording devices in order to document any telephone conversations that we may have in the future.

4. Furthermore, if any negative information is placed on my credit bureau reports by your agency after receipt of this notice, this will cause me to file suit against you and your organization, both personally and corporately, to seek any and all legal remedies available to me by law.

5. Since it is my policy neither to recognize nor deal with collection agencies, I will settle this account with the original creditor.

Give this matter the attention it deserves!

[Sign your name here]

[Insert your name here]

First point of advice would be to take a deep breath and slow way, way down. Everyone is pressuring you because they know you don't have cash and they want to get paid first before everyone else out of a dwindling set of assets. Slow the process down. Time - although it may not seem like it now - is on your side. Don't sell your car, don't take on a consumer loan. Slow down.

Your debt, while big to you, is minimal to the people you are working with, so they should be open to working through the issue with you.

a) Your lawyer, if it's a big firm, probably has a $2-3mm+ book, and a non-collection of $3k isn't going to effect them one bit. S/he has an incentive to work with you to come to an agreement on payment (if any) to maintain the relationship. Treat them with respect and you will get it in return. Deal with this bill last because it will be the easiest to manage.

b) $6k rackspace bill. Escalate the issue through the accounts payable department by explaining the situation and telling them they aren't going to get paid in full. If the first person on the phone doesn't get it, escalate to the next level, then the next level, etc. The gatekeeper's job is to put pressure on you to pay and create anxiety, which they seem to have done.

Once you get someone willing to work with you, fight to reduce the balance and then extend the payables as much as possible. For the value of the balance, figure out what rackspace could get by selling your receivable to a collections agency and offer slightly more - if they get $.18 per dollar owed, agree to pay $.19. Then, stretch the time period as much as possible.

c) Merchant account. This is where I would focus. This is your greatest exposure. Even if you didn't sign a personal guarantee, this could follow you professionally. Get on the phone with the merchant account holder and start dealing. Get the balance down to their cost first (that shouldn't be hard), and then see if you can grind it down farther. They have a loss reserve for this exact reason. Be open and transparent and pay the least amount possible while avoiding getting on the blacklist.

Bankruptcy (I'm not an attorney, so take this with the necessary grain of salt) is the last resort. It's long and painful for everyone involved - including you - and none of your creditors want to go there. Your creditors have an interest in working out your debts with you without going to court.

I don't get it. You're a Delaware C-Corp. You don't owe anything, do you?

Don't take out a loan. Don't restructure your debts. Don't negotiate with your creditors. Don't sell your car. Don't take a loan from your parents. Don't incur anything more than nominal legal bills.

Collect your contracts and take them immediately to your personal attorney and have them reviewed before you attach your own personal credit to your business'. Doing so is almost certainly unnecessary. You are probably just fine.

You are a businessperson, but you're not thinking like one, and you are going to get screwed. When your company's creditors worked out contracts with your business, they understood that they were assuming the risk that the company might go out of business and be unable to pay. That risk was priced into your contract terms.

If people you've done business with are now telling you that you should stake your personal finances on the debts of your company, then, absent some poorly thought out up-front agreement you had with those vendors to the contrary, you're being taken advantage of. Perhaps we'd benefit from hearing more about who those people are.

As for the merchant account: well, the people saying you could be blacklisted sure sound credible, and maybe you should listen to them. But please also note that there are people on this thread saying you should sell your car or take out a loan to satisfy someone else's debts, and take all the advice you get here with a big grain of salt. It shouldn't cost more than a couple hundred dollars to have an attorney explain to you (not your company, not your cofounder) that you are almost certainly not liable for thousands of dollars of company debts.

1. even if a company does business as an LLC or C corp, etc. if there wasn't much in assets when it was started (like cash), your corporate entity probably doesn't holdup;

2. most likely, you signed a contract with Rackspace personally right?

3. as for the merchant/credit card account - most require a personal guarantee anyway

So, first of all - I am sure your lawyer will defer or write off a bunch of that bill - happens all the time, especially if you have already paid a number of previous bills.

Rackspace is probably doing what most creditors do - acting as aggressively as possible. If they turn it over to collection, they are already looking at a huge writeoff (collection agencies get a nice percentage of whatever they collect and usually also have authority to write down the debt substantially in offers in compromise). So when push comes to shove, if you offer them a payment plan, I bet they will go for it or at least counter offer. Offer them $1,000 now, and $500 a month for 10 months say - that's full payment of the account. If you feel lucky, offer $3K, $1K now and $500 a month for 4 months.

The credit card account is going to be sticky - because unlike rackspace who made a profit margin on the $6K you owe, the credit card company has probably already refunded the $$ to cardholders that it "paid" to you - the fact that you describe it as "huge" doesn't help - I would assume it may be the majority of all payments advanced to you by the merchant provider. Again, you can probably propose a payment plan which has a good likelihood of being accepted.

Good luck.

It is in rackspace's own interest that you pay off, by sending the bill to the debt collectors they're going to end up with less than if you strike a deal with them, especially if the debt collection process forces you in to bankruptcy.

In whose name is the rackspace account? Corporate? Private? Are you incorporated?

Basically what you have to do is to come to an agreement where you contractually agree to pay them an X amount per month + some interest on the outstanding balance.

Make it clear to them that if they go the debt collection route that they will likely get nothing at all but that if they will come to an agreement with you that they have your word (for what that's worth) to make up for the hole.

How did it get this far?

I'm sorry to hear about the credit card fraud, every time someone here says they'll do their own processing I keep hammering on that, so I'll use the occasion to do it once again: Please do not do your own processing, use an IPSP that has very thorough fraud controls and scrubbing in place or you are very likely to get burned.

As for your lawyers fees, it sounds to me like he'll have to give you a discount.

Your co-founder being 'unreachable' is not very nice, in for the good times together, in for the bad times together, let's hope he turns up and will shoulder his part of the problem.

Kudos for not going incommunicado like your co-founder.