Filing for bankruptcy is one of the options that businesses can pursue when struggling to meet their financial obligations. It can provide an avenue for companies to liquidate their assets and pay creditors or reorganize the business to allow them to pay off these debts in the future.
When contemplating business bankruptcy, it is important to explore key considerations before making this decision to ensure you achieve the right outcome for you and your business.
Are you open to the changes that will come with a bankruptcy claim?
Filing for bankruptcy exposes you to a change in the status quo. A chapter 7 bankruptcy claim is not ideal if you want to continue operations, as it allows for the liquidation of all the company’s assets to repay debts. Such a move would lead to the closure of the business.
On the other hand, a chapter 11 bankruptcy claim will allow the company to continue operating but will include certain concessions. For instance, you may be forced to lay off staff and downsize to reduce operational expenses. If taking care of your employees is at the core of your beliefs, you may be better off pursuing other alternatives to keep the business afloat.
Will filing for bankruptcy affect your personal finances?
If you operate a sole proprietorship or partnership type of business, then declaring bankruptcy exposes you to the risk of losing personal assets. Under these business formations, the business and owner are part of the same entity; hence, the law requires a business owner to use personal assets to pay off debts.
While you will not be required to use personal assets to pay off company debts if you operate a corporation or limited liability company, creditors can seize your property if you have personally guaranteed a loan for your business. Creditors can also legally pursue your personal wealth if you mix your personal and business funds, such as using a personal credit card to pay for business expenses.
Are there other options besides bankruptcy?
Filing a bankruptcy claim can profoundly affect your business and personal life. You should ensure that your choice to file for bankruptcy aligns with your preferred outcomes; if not, consider alternatives.
Not all insolvency problems warrant filing for bankruptcy. If the company’s debts exceed its assets, the first step should be to reach out to the creditors and schedule an agreeable payment plan for both parties. There is a high chance your creditors will accept this type of arrangement.
If the company is unable to pay its debts due to liquidity problems but the assets exceed the liabilities, then disposing of some of the assets to pay the debt is another viable option.