If Your Business Is in Trouble, Should You File for Bankruptcy?
Owning a business comes with a lot of responsibilities – you need to take care not only of yourself but also of your workers, as well as everyone else who collaborates with your company, such as your suppliers, shippers, and sometimes even lawyers (but only from reputable companies, like Cartwright King or Summerfield Browne Solicitors).
Unfortunately, sometimes things don’t go as planned, and you might find yourself in a situation where the only reasonable choice is filing bankruptcy. However, is that really the way to go? That’s exactly what we will be analyzing in this article.
Is It the Right Choice for Your Company?
The truth is that it depends. Does your business have any chance of regaining a strong position on the market? Do you have enough assets to continue working if you decide to reorganize your company? Only after answering those questions, you will be able to determine whether filing for bankruptcy is what you should do.
Also, you need to understand that there are different types of bankruptcies that you can fill for, some of which allow you to keep your business. Knowing which business bankruptcy option will be the most appropriate in your situation can help you avoid legal actions from your creditors or retain your business assets.
Bankruptcy Filing Options
If, in the end, you will decide that filing for bankruptcy is the best thing that you can do for your company, you need to decide which type of bankruptcy you should choose:
Chapter 7 Bankruptcy
If your company doesn’t have enough assets to continue operating in the market and pay off its debts in the future, then you should file Chapter 7, which is used mainly to close down and liquidate the business.
The fact that the bankruptcy trustee sells the business’s assets, as well as pays off the creditors makes it an excellent choice for, for instance, small business owners who just want to close down their business without having to deal with everything associated with it.
However, keep in mind that filing Chapter 7 does not mean that your personal obligations will be gone as well – as a business owner, if your company is filing for bankruptcy, you need to file a Chapter 7 personal bankruptcy as well to eliminate your business debts.
Keep in mind, though, that filing for Chapter 7 bankruptcy doesn’t mean that your business days are over – there are some exemptions that can protect your assets from being sold.
Chapter 11 Bankruptcy
While Chapter 7 bankruptcy is used to close down a business, with Chapter 11, the purpose is to help you reorganize your company so that you can still remain in business.
With Chapter 11 bankruptcy, your assets are protected from creditors while you try to get your company back on track. The court appoints a trustee that oversights your actions. What’s more, during this period all your debts are reduced. However, you do have to provide all your creditors with full disclosure of information regarding what your business is going to do in order to make itself profitable again.
You have to keep in mind that filing for Chapter 11 is time-consuming and costly, which is why before you take any action in this direction, you need to assess whether your business has a chance of turning around and whether you are willing to sacrifice your time and money to make that happen.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is usually used by small business owners who do not qualify for Chapter 7. It allows them to pay down their personal liability for the debts of their business.
Contrary to Chapter 7, no business assets are sold. However, you do need to prove that your income will be enough to pay at least a portion of your debts. When it comes to self-employed individuals, as well as sole proprietors, this usually means that you need to monitor your income half a year prior to the bankruptcy, as well as have your tax returns, and any other documents that can be helpful in proving your earning capacity.
The Bottom Line
Owning a business is a challenge that comes with a lot of responsibilities. While probably everyone wishes to succeed, sometimes luck is not on our side, and you might find yourself in a situation where you have to fill in for bankruptcy.
You might be thinking – Oh no, what can I do now? It’s the end of my company!
Luckily, that’s not exactly true, as like you could see above – there are some types of bankruptcy filing options that allow you to keep your business, and help you get back on track. The important thing is to know when is the time to do it – don’t wait until it’s too late.