Many people use the terms “bankruptcy” and “insolvency” interchangeably. While neither is where any business wants to be, it’s important to understand that they are two different things.
A business is considered insolvent if it’s unable to pay its bills when they’re due. An owner whose business is insolvent may or may not file for bankruptcy to relieve their financial distress. There are actions they may take before that to restructure or pay off their debt.
Options to get out of insolvency
If a company’s debts are greater than its assets, business owners may reach out to their creditors to seek an arrangement where they can pay off their debt in installments. Creditors will often be agreeable to this because at least they’ll be getting what’s owed them – eventually. They may not if the business owner files for bankruptcy. By being proactive with creditors, business owners can avoid having those creditors initiate insolvency proceedings.
Sometimes, business owners are facing what’s known as “cash-flow insolvency.” Their assets are greater than their liabilities, but they don’t have enough liquidity to pay their debts. This can be remedied by liquidating some assets.
A business may be able to withstand temporary insolvency if it’s able to take the actions described above. If these actions are enough to bring them out of insolvency, however, filing for Chapter 11 bankruptcy allows them to get an automatic stay that will stop debt collection efforts by creditors. Chapter 11 can help a business owner either close down the business or restructure their debts and remain open.
If your business is facing insolvency, it’s wise to explore all of your options for debt relief – including bankruptcy – before you decide on a path forward.