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Bankruptcy is something that every business owner doesn’t want to face. Liquidation might be unavoidable, but the publicity can be humiliating and significantly block future career prospects.
All businesses experience a decrease in their profit margins, however, when those variations start to immerse a little deeper than the usual, it can be hard to escape. Consult your business attorney to ensure your company is on the right track. It can help you prevent future lawsuits and costly mistakes, especially when making a business acquisition decision and shady contracts.
Reasons why avoiding business bankruptcy is necessary
Some entrepreneurs take filing for bankruptcy lightly nowadays. They will just hire a bankruptcy lawyer, file some documents and then their problem is fixed. But it’s not that easy, that is why it is important to avoid bankruptcy at any cost because of these reasons:
- There will be a massive drop in the credit. The bankruptcy will remain on the credit report for seven to ten years, and it will be difficult in the future, especially when it comes to getting a loan. The worst case is that it will take at least three years to file again for a mortgage.
- Filing for bankruptcy can be expensive. Doing it right needs a decent attorney to handle it and getting an attorney is not for free. Remember, bankruptcy can still be costly.
- It can cause emotional damage to relationships. The entrepreneurs can be sued, have to go through hearings, and have to deal with lawyers. It is not an easy process.
Ways to consider to prevent bankruptcy
To avoid bankruptcy, it is necessary to plan some steps that can stop the company from insolvency. Even an experienced businessperson can be caught off guard by the fast-changing technology, times, and the stock market.
Avoiding business bankruptcy takes a willingness to commit and to reevaluate a new plan. Here are some things that need to be considered.
1. Improve the processes and find more money
If a company is primarily based on receiving payments on their invoices, it might be the right time to improve the way they manage their finances. Depending entirely on invoices is a dangerous thing. It is essential to look into the budget and find the portion where the expenses could still be lowered, and finances are tightened.
If cash is plenty, then the business would not fail. If the company starts to struggle, it is crucial to borrow money or convince investors to step up. To be successful, it is a must to liquidate some part of the business.
2. Reassess your staff
No one wants to fire their employees, but it might be the right time to take a close look at what’s happening within your organization. A change in administration can be the answer to the most significant problems. A struggling company might need to have new people and new ideas as well.
For the changes to be successful, a change in management is a must, or at least a willingness to acknowledge that the same business routine cannot continue. It needs correct and even tough decisions. However, without the right individuals in place, the opportunities for development are lower.
3. Think about getting a factoring company
Many factoring companies already helped firms to avoid filing for bankruptcy. It is because they ensure businesses a quick payment for their services and goods. Factoring companies are the ones to purchase their invoices and take charge of tracking down the payment from the clients.
4. Preventing excessive expenses
The regular payments could drag the business more than you realize. Business owners need to ensure that they properly analyze all expenses, such as rent, or labor costs.
Some firms establish a contract with the supplier or a credit account and then just forget about it, however, the economy always changes which causes the value of the expenses to increase and decrease well.
Changing proper values and interest rates are important reasons businesses run into a financial struggle.
5. Hiring a consultant
Real change can be very hard, especially when the administration team is always focusing on themselves. Considering hiring a consultant who specializes in boosting failing companies. An outside specialist that has a fresh perspective can assist in solving a workable plan for business problems without specifically requiring the owner to hire a new team for his or her management.
Also, it’s essential to get a business lawyer when starting up a business, hiring a business lawyer can help you prevent costly tax penalties and fraudulent contracts that can harm the finances of your business. It’s better to be a step ahead than sorry in the future since bankruptcy has always been associated with something negative. You don’t want to get your reputation dragged negatively in the business industry.
6. Provide an assignment for the benefit of the creditors
Most companies fail because they no longer have a purpose for a huge customer base, so there is no reason to spend energy and time trying to create and implement a change in plan. It is better to liquidate them and move on to a more useful enterprise.
Common types of bankruptcy
Before filing for bankruptcy, anyone should have an idea of what kind of bankruptcy they will be recording. So, here is a brief explanation of two common types of bankruptcy.
- Chapter 7 Bankruptcy
This type of bankruptcy is quick and doesn’t need to commit to a repayment plan. To qualify for filing Chapter 7 Bankruptcy, it is a must to make less than the state’s average income for a household and keep the property on the state exemption list.
The bankruptcy trustee or someone who is accountable for finding money for the creditors will sell any properties which are not exempted and issue the proceeds to the creditors. Once the bankruptcy is done, dischargeable debts such as medical bills, credit card balances, and personal loans get cleared.
Most debts have expiration dates as well, which comes when the “statute of limitation” will start working. The creditors need to file a case within the required time of the statute of limitations. If this period exceeds, the creditor won’t be able to sue to collect the balance the debtor owes.
Chapter 7 Bankruptcy works if the entrepreneur doesn’t have a lot of money, and doesn’t have enough belongings that can be sold to pay the debt. And most important, it is a method of an option for all the debts to go away.
- Chapter 13 Bankruptcy
When a business owner has money left after paying some household expenses, they cannot file for Chapter 7 bankruptcy. Instead of filing for Chapter 7 bankruptcy, they would have to file for a Chapter 13 bankruptcy and pay to the creditor for over a three or five-year repayment plan.
In this type of bankruptcy, the trustee does not sell any belongings. Instead, it is necessary to pay the exact value of the non-exempt property to the creditors in the repayment plan. This means, the more property the debtor has, the higher the monthly payment will be.
After completing the repayment plan successfully, any remaining balances on the dischargeable debts are released.
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Takeaway
When a business or company hits a hard time and doesn’t know how to recover, its owner might want to think about filing for bankruptcy, particularly if the firm has significant debt. Most of them don’t need to file for bankruptcy just to escape from their financial mess. However, bankruptcy only requires the owner to be organized, and start a systematic way of paying the debt.
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