Bankruptcy is frequently regarded as a last resort for a company. It is frequently interpreted as throwing in the towel and giving up. Some situations necessitate nothing less than Chapter 7 bankruptcy and the closure of the doors. However, this is not always the case. Some businesses that are experiencing cash flow issues and overwhelming debt can use other forms of bankruptcy or non-bankruptcy strategies to gain some breathing room and resolve their issues without having to close their doors. The question then becomes how to determine whether or not some form of bankruptcy is appropriate.
Let us first define what it means to be bankrupt. When a company’s expenses and debt payments exceed its revenue, it declares bankruptcy or becomes insolvent. If this is the case for your company, you should seriously consider filing for bankruptcy. However, this is not the only determining factor and does not indicate which type of bankruptcy is best. Bankruptcy is not always the solution, even for insolvent businesses, and some solvent businesses will benefit from bankruptcy.
Other factors to consider include:
Some financial advisors advise against filing for bankruptcy unless your personal assets are at risk. However, if you can’t run your business without the assets that are likely to be seized, bankruptcy should be seriously considered.
In a Chapter 7 bankruptcy, your company’s assets are sold and the proceeds are used to repay creditors. It is not recommended unless the other forms of bankruptcy are unlikely to resolve the issues at hand, as Chapter 7 effectively shuts down the business.
Chapter 11 is a reorganization bankruptcy that requires creditors to modify the terms of debts owed to them for a period of time in order for the debtor company to return to solvency. It is a complicated and expensive process that is best suited to large corporations and wealthy business owners who require more flexibility or do not meet the income requirements for Chapter 7 or 13.
Chapter 13 is a reorganization bankruptcy that is similar to Chapter 11, but it is simpler and less expensive. It allows a company to reorganize its finances, change repayment terms, and discharge some debts. For small businesses and closely held corporations or limited liability companies, this is frequently the first option to consider.
All types of bankruptcies require creditors to suspend debt collection once the debtor-bankruptcy company’s petition is filed in bankruptcy court. This allows the debtor company to develop a strategy without fear of impending lawsuits or repossessions. Occasionally, bankruptcy is filed to activate the stay against creditors, but the company later decides not to complete the bankruptcy process while discussing options with creditors.