Business bankruptcy is one option that has a stigma attached to it. But is it really the last option when your business is seriously faced with a financial crisis? Well, there is no longer the need to fear bankruptcy. In fact, a business in financial distress and debt can use bankruptcy to heave a sigh of relief from the stress buildup without shutting down the business. So how do you know bankruptcy is appropriate in your situation?
Business Bankruptcy: Is It Appropriate?
Typically, a business becomes bankrupt when its debts overburden its revenue.
- A business might consider bankruptcy if a lender has issued a technical default, indicating their unwillingness to work with them.
- Bankruptcy might be an option if a business cannot repay debts or monthly bills.
- In some crisis situations, a bank or financial lender might be threatening to take legal action against its assets.
- A business might be stressed for time to negotiate with lenders and filing for bankruptcy might be appropriate in that case.
- Does the debt put your personal assets at a risk? Or the assets of shareholders at a risk too? It might help to determine whether your business will have a positive cash flow if there were no more debts.
Bankruptcy Options
You need a breathing room to get rid of the debt burden. Bankruptcy might be the pill here but you need to ensure that the business can run without the assets that will be sold off to repay the debtors.
Chapter 7
The business assets are sold so that the proceeds can be used to pay off creditors. Remember, Chapter 7 would mean shutting down the business. Are you ready for it? You can always consult with a legal professional to determine if you should file for Chapter 7 bankruptcy or Chapter 11.
Chapter 11
Chapter 11 gives an opportunity to the debtor business to return to solvency. Under Chapter 11, creditors are required to modify terms of debts for a certain period of time to allow the debtor time. Ideally suited for large corporations, Chapter 11 is a complex and costly process.
Chapter 13
Like Chapter 11, Chapter 13 is a reorganization bankruptcy and creditors should modify their repayment terms. However, it is not as complex and costly as Chapter 11. A business gets a chance to reorganize its finances in order to discharge some of its debts. Many limited liability companies and small scale businesses choose this bankruptcy option.
All in all, creditors must halt their operations of debt collection when a debtor applies for any of these bankruptcy options. It’s an opportunity for the debtor to create a plan without the fear of impending lawsuits or legal actions.
Should You Opt for Bankruptcy?
If your business is under debt and financial crisis, you might be struggling with cash flow too that makes it tough to repay your debts. Consulting with an experienced bankruptcy attorney who can help you determine the best options for your business. It’s never too late to be in touch with a legal professional who can help steer your drowning ship out of the troubled waters.