Bankruptcy is a legal process whereby an individual, corporation, partnership, or sole proprietorship seeks protection from hounding creditors and/or needs time to restructure or wants to dissolve its business operations without the owner losing his or her personal assets. Here are the top 3 reasons why small businesses find themselves in bankruptcy court:
- Poor management. A business needs paying customers, a good product, hardworking employees, a good location and an attention to tax obligations. If any of these factors that make a business successful are lacking, it risks failure. If your business qualifies by having sufficient income though it finds itself unable to pay its debts, then a Chapter 13 or perhaps a Chapter 11 might be a viable option for you. Many business ventures fail from lack of experience, education, poor customer service or by not having fully researched the need for the particular product or service you are offering.
- Lack of financing. If your business is struggling, lenders may not feel you are a sound investment and will not grant your business additional funding or an infusion of new capital. Also, having a high amount of debt may not make much difference if the funding is inadequate to meet obligations and you do not take steps to alter your business plan, scale back on operations or employees, or find new customers. For some, though, filing a Chapter 13 or a Chapter 11 might give your business time to restructure, renegotiate contracts and leases on more favorable terms, and gradually pay off creditors.
- Unforeseen Events. Your business may be struggling for various reasons such as a natural disaster, injury accident, a liability lawsuit or an unexpected large expenditure. Another reason may be adverse market conditions or a shift in consumer preferences from your product or service to another. For these reasons, you are unable to meet your obligations but a reorganization or restructuring of your business could allow you to continue operating and to start realizing a profit that could attract investors or give lenders confidence in granting you needed funding. For a small business owner with a home mortgage but facing foreclosure, a Chapter 13 can stay the foreclosure and allow you to make current payments while making up for missed payments over the life of your repayment plan. Otherwise, it might be wise to wind up your business by declaring Chapter 7 bankruptcy and saving your exempt assets from being sold off and distributed to creditors.
If your business is unprofitable and creditors are constantly demanding payment, discuss your legal options with a DCDM bankruptcy attorney and financial advisor regarding whether bankruptcy protection is suitable for your situation. Bankruptcy is usually your last option and you need to know exactly what it can and cannot do for your small business operation.