During tight economic times, one of the most difficult decisions that any business can face is deciding on whether or not to file for bankruptcy. Business bankruptcy is never an easy decision to face and by all means should be the very last option that the owner should consider. It is important to understand also that filing for a business bankruptcy is not as easy as personal bankruptcy. One of the best ways to handle this is to seek legal and financial advice before taking on any action that you might regret.
In essence one of the basic reasons why business bankruptcy would even be considered is if there is a low cash flow compared to the actual expenses being incurred during operation. When this happens a business bankruptcy relief may be the most logical choice for the owner rather than face embarrassment and risk credit history. Many business analysts suggest that availing of business bankruptcy may even be the best tool that you can have to save your business. This is because you may get the chance to consolidate your loans or restructure your debts allowing the business owner to come out with a fresh start. Here are some things to consider before deciding on filing for business bankruptcy relief.
- One of the first things to consider is the structure of the business. Is your business a sole proprietorship, partnership, or corporation? Basically corporations are considered as limited liability companies because once they file for business bankruptcy the personal assets of the stockholders are not affected. Partnerships on the other hand are made up of separate individuals whose personal assets are also not affected when the business files for bankruptcy. Sole proprietorship on the other hand does not make a distinction between the business property and the personal assets of the owner. This means that if business bankruptcy is declared on a sole proprietorship, the personal properties of the owner may be liquidated in the process.
- As a business owner it is also entirely understandable to consider whether you should file for bankruptcy or simply reorganize. To be able to answer this accurately you must have a grasp of why your business reached such a delicate financial condition. You must also realize that if you reorganize you do not create a new market, increase your revenue, or increase your skill in running the business. However, if you reorganize you may be able to free up some valuable cash that may be able to cover the majority of your outstanding debts. If you believe that none of these can correct the financial condition of your business then you are ultimately left with filing for bankruptcy.
- You must also consider that bankruptcy reorganization under Chapter 11 requires not only the owner but the managers as well to comply with the requirements set by the bankruptcy system. As such, they must communicate with counsel and negotiate with the creditors which can result in a very expensive process. As part of the protection provided by the filing of the business bankruptcy, the business owner is required to divulge the entire financial condition of the company not only to the creditors but to the court as well. This happens not only at the start of the bankruptcy process but every month thereafter until the bankruptcy is still in effect.
- Another important consideration that the business owner must take into account is the type of business. Normally if the business is something that can be restarted easily after liquidation of assets, then bankruptcy is a good solution to settle financial obligations. Basically a business that requires a small capital and few assets are very easy to put up. The same goes if the business is based on the skill sets of the owner more than anything else. If these are the conditions, then filing for a business bankruptcy is a very optimistic solution for your business. In order to effectively weigh your options in this case, it would be better to seek the help of business professionals or consultants. Sometimes an outside input is the best way for you to decide on the path to go with your operation.
- The business owner must also realize that a Chapter 7 bankruptcy is applicable for both individuals and corporations. When there is absolutely no financial future for the business and outstanding debts keep on growing daily, filing for a Chapter 7 business bankruptcy becomes a legitimate choice. It must be realized though that a corporation unlike individuals does not get a fresh start when filing for business bankruptcy under Chapter 7 of the Bankruptcy Code. It can however allow for a more organized way of liquidating assets under the supervision of a trustee and the stockholders are not required to shell out additional money. This also assures creditors that they will be paid based on the availability of assets and the priority of the claims of the creditors. Individual tax liabilities can also be covered should anything be left after settling outstanding obligations with creditors.
- Another valid option, especially for publicly held companies, is to file for business bankruptcy under Chapter 11 instead of Chapter 7. The reasoning behind this is that a Chapter 11 allows the business to continue operation with the control remaining under the same management despite an ongoing bankruptcy process. This option can allow the owners to build up the business again based on a financial strategy or business plan. Sometimes this strategy makes the business profitable again but in some instances it still results in liquidation.
As you can see, business bankruptcy relief is more complicated than it seems. Although there may be some provisions similar to personal bankruptcy, it must be realized that the consequences impact more people because of the potential unemployment result. For most creditors however, it would be better if business bankruptcy is not availed of because there is the possibility that they will receive nothing when the operation closes down.