Equipment Financing Debt: Options When You're Underwater

Equipment financing seemed like a smart move: finance the trucks, machinery, computers, or restaurant equipment you need, pay it off over time. But what happens when the equipment breaks down, becomes obsolete, or depreciates faster than you're paying down the loan?

You might owe $100,000 on equipment worth $40,000. You can't sell it to pay off the loan. You can't afford the payments. And the lender has a security interest in assets you need to operate.

Here's how to navigate equipment financing debt relief.

Understanding Equipment Financing

Types of Equipment Financing

Equipment Loans:

• Traditional loan secured by equipment
• Fixed term (3-7 years typically)
• Equipment is collateral
• You own equipment from day one
• Interest rates: 6-15% depending on credit

Equipment Leases:

• Lease equipment for fixed term
• $1 buyout or FMV (fair market value) buyout at end
• Lender owns equipment during lease
• Often easier to qualify than loans
• Effective rates: 8-25%+

Sale-Leaseback:

• Sell equipment you own to lender
• Lease it back for continued use
• Get cash upfront
• Monthly lease payments

The Underwater Problem

Equipment typically depreciates on this schedule:

Meanwhile, your loan balance decreases slower (especially with interest).

Real Example:

• Financed delivery trucks: $150,000
• 7-year loan at 9% APR
• After 3 years: Loan balance $95,000, truck value $75,000
• Underwater by $20,000

If you can't make payments and lender repossesses, you still owe the deficiency ($20,000 in this example).

Your Options for Equipment Financing Debt

Option 1: Refinance the Equipment

How it Works:

Take out new financing to pay off current loan, ideally at better terms.

Requirements:

• Equipment still has substantial value
• Decent credit (640+ typically)
• Business still profitable
• Equity in equipment helps (but not required)

Benefits:

• Lower interest rate reduces total cost
• Extend term to lower monthly payment
• Avoid default/repossession

Drawbacks:

• Extends time paying on depreciating asset
• Refinance fees (origination, appraisal)
• May require additional collateral if underwater

Best For: Equipment still functional and needed, can afford lower payment, credit decent

Option 2: Negotiate Loan Modification

How it Works:

Contact lender and request modified terms: lower payment, reduced interest, extended term.

When Lenders Agree:

• You're current but struggling
• You have documented hardship
• They believe you can pay with modification
• It's cheaper than repossession

What to Propose:

• Interest-only payments: Temporarily (3-6 months)
• Reduced payment: Extend term to reduce monthly amount
• Payment deferral: Skip 1-3 months, add to end of loan
• Re-amortization: Recalculate payment based on current balance

Best For: Temporary cash flow problem, equipment still needed, good lender relationship

Option 3: Voluntary Surrender

How it Works:

Return equipment to lender voluntarily. They sell it at auction. You owe the deficiency (loan balance minus auction sale price).

The Math:

• Loan balance: $80,000
• Auction sale: $35,000 (equipment often sells for 40-60% of value)
• Deficiency owed: $45,000
• Plus: Repossession costs, legal fees, interest
• Final amount owed: ~$50,000+

After Surrender:

• Lender pursues deficiency (lawsuit, collections)
• Reported to credit bureaus (7 years)
• May sue for judgment
• You can negotiate settlement on deficiency

Pros:

• Stop monthly payments immediately
• No repossession agent showing up
• Slightly better than forced repossession
• Can negotiate deficiency settlement later

Cons:

• Still owe substantial deficiency
• Lose equipment (can't operate if needed)
• Credit damage
• Personal liability if you guaranteed

Best For: Equipment no longer needed/useful, can't afford payments, willing to deal with deficiency

Option 4: Sell Equipment and Pay Off Loan (If Possible)

When This Works:

• You have equity in equipment (worth more than you owe)
• Or you can come up with cash to cover deficiency
• You don't need the equipment anymore

Process:

1. Get payoff quote from lender
2. Get equipment appraised/valued
3. List equipment for sale (eBay, industry marketplace, broker)
4. Contact lender about sale (they hold title/lien)
5. Arrange payoff at closing

If Underwater:

You can still sell, but you'll need to bring cash to closing to cover the difference. For example:

• Loan payoff: $60,000
• Sale price: $45,000
• You bring to closing: $15,000

Best For: Don't need equipment, want clean exit, have equity or cash to cover deficiency

Option 5: Include in Bankruptcy

Chapter 11 (Business Reorganization):

• Restructure equipment financing in payment plan
• May be able to "cram down" loan to equipment's current value
• Keep equipment and continue operating
• Court-approved payment plan (3-5 years)

Cramdown Example:

• Owe $80,000 on equipment worth $50,000
• Court may reduce secured claim to $50,000 (equipment value)
• Remaining $30,000 becomes unsecured (paid pennies on dollar)
• Pay $50,000 over 5 years instead of $80,000

Chapter 7 (Liquidation):

• Equipment gets liquidated (sold)
• Proceeds go to secured lender
• Deficiency discharged (you don't owe it)
• Business typically closes

Best For: Equipment debt is part of larger debt problem, business viable (Ch11) or closing (Ch7)

Chapter 11 Guide →

Option 6: Continue Paying (Wait for Equity)

Sometimes the best option is to keep paying if:

• Equipment is essential to operations
• You can afford the payment
• Eventually you'll have equity (pay down over time)
• Equipment has long useful life remaining

Being underwater isn't a problem unless you need to sell or can't afford payments.

Special Considerations

Personal Guarantees

Most equipment financing requires personal guarantee. This means:

• If business defaults, you're personally liable
• Lender can sue you personally for deficiency
• Your personal assets (home, savings) are at risk
• Appears on personal credit report

Strategies:

• Negotiate release of personal guarantee (difficult)
• File personal Chapter 7 if guarantee liability is crushing you
• Settlement on deficiency after repossession

Tax Implications

Debt Forgiveness:

If lender forgives deficiency (or you settle), you'll receive 1099-C for forgiven amount. This is taxable income.

Depreciation Recapture:

If you claimed depreciation deductions and then surrender/sell equipment, you may owe depreciation recapture tax. Consult CPA.

UCC Liens

Equipment lenders file UCC-1 financing statements, creating a lien on equipment. This means:

• They have first priority if you go bankrupt
• You can't sell without their permission
• They can repossess if you default
• Lien shows up in credit checks (affects future financing)

Industry-Specific Scenarios

Construction/Contractors

Common Equipment: Excavators, trucks, trailers, tools

Challenge: Equipment takes beating, depreciates fast, revenue seasonal

Best Option: Seasonal payment plans, refinance during busy season, sell underutilized equipment

Restaurants

Common Equipment: Ovens, refrigeration, POS systems

Challenge: High failure rate, equipment loses value if restaurant closes

Best Option: If closing, negotiate deficiency settlement; if staying open, refinance or Chapter 11

Transportation/Trucking

Common Equipment: Semi-trucks, trailers, vans

Challenge: Mileage depreciation, maintenance costs, fuel prices

Best Option: Refinance if credit decent, voluntary surrender of oldest units, keep newest/most efficient

Healthcare/Dental

Common Equipment: X-ray machines, dental chairs, medical devices

Challenge: Rapid technological obsolescence, expensive, specialized

Best Option: Sell to used medical equipment dealer, upgrade-and-refinance programs

Frequently Asked Questions