If your business has been experiencing financial difficulty for some time, is filing for bankruptcy the appropriate step? And if so, what bankruptcy options do you have?
If the real problem is anticipating when cash will next be available, you may want to review our guides on cash flow:
- How and Why to Manage Cash Flow
- How to Anticipate Cash Flow Problems
- The Complete Guide to Understanding Cash Flow
If there really is nothing you can do but prepare for filing for bankruptcy, this post will give you a basic understanding of what you need to know about your filing options.
A business can experience financial problems for a variety of reasons, including, but not limited to:
- Changing market conditions
- Shrinking revenue and/or profits
- Lack of proper cost control
- Poor company leadership
- Flawed business strategy
- The introduction of a new product or service by a competitor
- Failure to adapt to new technology in the industry
It could even be that you had the right product or service at the wrong time. As a result of any of these issues, you may be struggling to pay your current expenses, your suppliers, and your creditors.
If you have been dealing with financial issues for some time, you may wish to consider filing bankruptcy—either to obtain protection from creditors while you reorganize the firm, or to close down the business.
There are a number of different forms of bankruptcy that you can use, depending on your business’s legal structure and whether you believe the business can be turned around and become profitable again, or whether it is too far gone to save.
Is filing for bankruptcy the right decision for your company?
That may depend, for one thing, on whether your business is in a growth or declining marketplace. For another, can you regain your competitive standing in your market? Do you have sufficient revenue and assets to continue in business if you decide to reorganize?
It’s important that you understand the different types of bankruptcy under the law, and to determine the bankruptcy options available to you and your business. This is important because deciding on the appropriate bankruptcy option can help you to retain your firm’s assets, avoid legal actions from your creditors, and affect plans you may have to turn your business around and rebuild it.
Bankruptcy filing options:
Here are some of the options your business should evaluate when considering filing for bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is primarily used to close down and liquidate a business. It is appropriate when the business does not have significant assets to continue to operate and to repay its debt obligations.
Whether your business is a partnership, a corporation, or an LLC, you can file Chapter 7. As part of the Chapter 7 process, a bankruptcy trustee sells the business’s assets and pays its creditors. That aspect makes Chapter 7 an attractive option for small business owners who wish to close their business and do not want to deal with selling assets and negotiating with creditors.
However, Chapter 7 does not eliminate any personal obligations you may have in connection with the business’s debts. If you are a sole proprietorship, you must file a Chapter 7 personal bankruptcy to eliminate your business debts.
It is also possible to remain in business after filing Chapter 7, since there are some exemptions to protect business assets from being sold.
Chapter 11 Bankruptcy
In contrast with Chapter 7, Chapter 11 bankruptcy is designed to help a company reorganize so that it can remain in business.
Chapter 11 enables a business to protect its assets from creditors while it is attempting to turn itself around. This type of bankruptcy applies to sole proprietorships, corporations, and partnerships. Under Chapter 11, there is significant oversight from a court-appointed trustee. During this period, debt payments are reduced while the company reorganizes. During the Chapter 11 process, the business owner must provide full disclosure of information to creditors about what the company is doing to make itself profitable again.
It is costly and time-consuming for a company to file for Chapter 11 protection and go through the reorganization process. In determining whether to file Chapter 11, the business owner has to decide whether the company has a real chance of turning around, and whether he or she is willing to invest the time and energy in the process.
Chapter 13 Bankruptcy
For a sole proprietorship, there is another bankruptcy option. If you are a sole proprietor, you and your business are considered to be the same entity. In this case, you file Chapter 13 as the business and as an individual combined.
Chapter 13 is designed to let you keep all your property and reorganize your debts through a repayment plan.
This form of bankruptcy is often used by small business owners with a great deal of personal assets or by those who do not qualify for a Chapter 7 filing. In addition to being used by sole proprietors, Chapter 13 enables small business owners to pay down any personal liability for debts of their business.
In a Chapter 13 filing, no assets are sold, but you do need to demonstrate that you have enough income to repay a portion of your debts. For sole proprietors or self-employed individuals, this typically requires that you monitor your income for the six months prior to the bankruptcy and that you have tax returns and other documentation to prove your earning capacity.
The bottom line:
Filing for bankruptcy can be complicated, and in deciding whether to go forward with a bankruptcy and which type to file, it is important to consult with a qualified attorney who handles bankruptcies, as well as a tax attorney or CPA. These are critical decisions, and require the knowledge and experience of experts.
Strapped for cash?
If your business problems are related to cash flow, or you simply don’t have enough cash on hand, consider taking out a line of credit with a bank, or reviewing some of our alternative funding options. It’s best to do this before you run into problems, rather than afterwards.
Let us know if we can help you find the right resources to solve your problem.