Businesses that fail to pay back their creditors are often at risk for bankruptcy. Their revenues cannot fund their business operations, making it difficult to keep up with debt repayments. Filing for bankruptcy is an option if companies and sole proprietorships want to solve their financial obligations to their creditors.
Filing for bankruptcy is not an easy task, as you need to know if it is a good solution for your business. You also need a legal practitioner to advise you on how to file for bankruptcy. Your lawyer will walk you through the process to make it faster and easier.
Why Businesses Go Bankrupt
Business ventures, especially the ones that are just starting out, should learn the various reasons why businesses fail. It is crucial to know the causes that lead to bankruptcy to avoid making the same mistakes all over again. Some of the most common reasons why businesses go bankrupt are:
- Overspending. Startups tend to overspend because they are still acquiring assets and purchasing supplies for their everyday operations. However, spending too much may cause your business to fail.
- Mismanagement. If incompetent people manage your business, you are putting it at risk for bankruptcy. People who do not have the managerial skills cannot contribute to your business’ growth.
- Choosing the wrong target market. Marketing your product to the wrong consumers may cost you money. You are paying for marketing efforts that will not work in the first place because you have the wrong audience.
- Failure to keep up with consumer demand. Catering to consumer demands is tricky because they are always changing. If your business cannot create products that can address your consumer’s needs, this will hurt your business.
Types of Bankruptcy
Businesses can file one out of the three types of bankruptcy:
- Chapter 7 Bankruptcy or Liquidation. This type is also known as complete bankruptcy or straight bankruptcy. Businesses typically file this kind of bankruptcy because it allows them to have a fresh start. The business’ assets are converted to cash. The total amount is deducted from the number of debts. This type relieves the company from any personal liability for dischargeable debts.
- Chapter 11 Bankruptcy or Reorganization. Businesses that wish to continue their operations while they pay back their debts can file for Chapter 11 bankruptcy. If the company files for this kind of bankruptcy, it must submit a reorganization plan to the courts. The court will, hopefully, approve the plan. The debtor is obliged to stick with the agreed payment plan, and face legal repercussions if they fail to do so.
- Chapter 13 Bankruptcy or Adjustment of Debts. This type of bankruptcy is intended for individuals who still have the desire to pay back their creditors. Those who are filing for Chapter 13 bankruptcy will present a payment proposal to the court, which is subject to their approval. The payment plan will show how the debtor plans to pay the creditor within three to five years. You may click here to learn more about the process.
Is Bankruptcy The Right Choice for Your Business?
Deciding on whether bankruptcy is the right option for your business will depend on your business. You have to assess it before you choose which kind of bankruptcy you are going to file.
Here are some simple ways to know if bankruptcy is the best choice:
- Sole proprietorships. Sole proprietors are considered as a legal extension of the business. Therefore, the owner is responsible for all the business’ assets as well as the liabilities. If filing for bankruptcy, the sole proprietor must:
o Assess your capacity to pay. Do you still plan on paying your debts? Do you still have the capability to repay your creditors? If you still plan on paying your creditors back, but you cannot do so, you can file for bankruptcy.
o Review your assets. Your assets can help pay back your creditors. Through the court’s orders, your assets’ values can be a form of repayment. They just need to determine the value.
o Determine if you will continue running your business. Are you still hoping to maintain your business? If you lost hope in saving your business, bankruptcy might be the best option for you.
o Choose the type of bankruptcy applicable to your situation. Sole proprietors can file Chapter 7, 11 or 13 bankruptcy. If the owner wishes to discontinue operating the business, he or she can submit Chapter 7. However, if he or she wants to continue the business while paying back the loans, Chapter 11 and 13 are ideal.
- Partnerships and corporations. Business owners who are part of a corporation or a partnership are separate legal entities from their businesses. If you want to file for bankruptcy, you may think about the following:
- Business continuation. Determine whether you want to continue the business or not. There are instances when the owners already lost hope in saving their business so when they file for bankruptcy, they choose the one that wipes all their debts clean.
- Liquidity. Do you have the capability to pay for your debts? Are you willing to pay back your creditors without closing down your business? Your business’ liquidity enables you to gauge if you can pay your debts even if you file for bankruptcy.
- Future plans. If you plan on closing down your business and start anew, you can choose to file Chapter 7 bankruptcy. However, if you still have a glimmer of hope left for your business, you can opt to file for bankruptcy under Chapter 11.
Business that are on the brink of going bankrupts are usually challenged by their ability to manage cash flow. If you do not have a balanced flow of cash, you do not have enough liquid to pay back your debts. Therefore, your only option is to file for bankruptcy.
Claudia Marshall is equipped with more than 20 years of experience as a law writer where she writes informative pieces on law topics for the common reader. Claudia spends time with her husband and children when she has free time.