For all intents and purposes, your business is a living, breathing organism. It must be strengthened, encouraged, and protected. Otherwise, it can fall victim to outside challenges – particularly in tough economic conditions such as these. And if you’re going through bankruptcy, it’s imperative that you know exactly what you’re doing.
How Does Bankruptcy Work for Business?
We often treat bankruptcy like a bad word. There’s this notion that it’s an awful thing that should only be deployed on a last-resort basis when all other options have been exhausted. But nothing could be further from the truth.
“Bankruptcy is one of the most powerful tools you have available at your disposal as a business owner,” bankruptcy attorney Rowdy G. Williams mentions. “But – and this is critical to know – it can either wreck your business or save it. It all depends on how you use it.”
To leverage bankruptcy properly, you must understand it. Bankruptcy is basically a legal proceeding that can be initiated when a business is unable to repay outstanding debt. It provides the business with an opportunity for a fresh start by reorganizing and/or dissolving debt.
For businesses, there are essentially three different types of bankruptcy:
• Chapter 13: This is generally reserved for businesses that are run as sole proprietorships (i.e. one-person operations with no established legal entity). This option is used when the goal is to reorganize rather than liquidate.
• Chapter 7: This is a liquidation bankruptcy. Businesses choose this option when there’s no viable future and they just want to liquidate assets and move on.
• Chapter 11: This is ideal for business reorganization. Partnerships and corporations use this option when they want the business to continue after bankruptcy.
Bankruptcy Tips for Businesses
Learning to use bankruptcy properly is extremely important. Here are several tips that will help you tremendously as you think about bankruptcy and all that it entails:
1. Try to Avoid Bankruptcy
The first tip is pretty simple: Try to avoid bankruptcy at all costs. Yes, it has its place. Yes, it’s a powerful tool. But, no, it’s not the preferred outcome. If you can avoid bankruptcy, it’s far better for the health and stability of your business.
Avoiding bankruptcy is simple in theory, but often much more difficult in practice. Don’t overextend your finances. Manage your money well and always keep at least three to six month’s worth of cash on hand. Be careful not to take on too much debt. Hire smart people who care about the finances of your company. Sound principles like this will keep your hand away from the fire and allow you to grow comfortably without facing excessive risk.
2. Know When to File for Bankruptcy
Despite your best efforts, it may not be possible to avoid bankruptcy. As the pandemic showed us, there are situations for which no amount of preparation can keep you insulated from financial trouble. In these cases, you should know when to file for bankruptcy.
The best thing you can do is surround yourself with the right people. Start by working with a debt consolidation specialist and/or financial advisor to see if there’s a way to properly manage cash flow and consolidate your debt into a single loan with a competitive interest rate. Depending on how deep you’re in debt, this could be enough to provide relief.
If debt consolidation doesn’t work, hire a business bankruptcy attorney to walk you through the best approach (Chapter 13 vs. Chapter 7 vs. Chapter 11). They can also help you manage your debt and assets to avoid owing more than you have to.
3. Stay Lean and Focused
At the end of the day, you should emphasize staying lean. Whether you pursue bankruptcy or not, running a lean business that’s free of unnecessary expenditures and non-critical investments will reduce your risk. It’ll also lower your stress levels and make you a happier business owner overall.
Adding It All Up
As you can see, bankruptcy has its place. In many cases, you can file for bankruptcy, dissolve some/all of your debt, and not lose any important assets. In other situations, some sacrifices will have to be made, but the long-term benefits will outweigh these up front costs. Either way, bankruptcy is a tool. Use it wisely and it’ll set you up for a much brighter future.