A business is declared bankrupt when it is insolvent. Bankruptcy is a legal statement by a court when a business doesn’t possess the ability to repay its debts.

A business filing for bankruptcy can be discharged of its debt or be put on a repayment plan, based on the type of business bankruptcy filed.

Although filing for business bankruptcy can help revive a business, it could leave a scar for years on the business. In most cases, the credit rating for such businesses becomes low and makes it hard to apply for loans in the future.

To avoid business bankruptcy, businesses must duly keep accounts of records and act fast at the slightest instance of bankruptcy. Acting fast can save your business from unnecessary troubles.

Whether your business is doing fine or not, you need to know what bankruptcy entails, how to avoid it, and how to fix a bankrupt business. In this article, we will be exploring bankruptcy and ways to avoid and fix it.

What Is Business Bankruptcy? 

Business bankruptcy is declared when a business owes too much than it can pay. Filing for a business bankruptcy begins when a petition is filed in a bankruptcy court by the debtor. The petition is usually filed in the location of the debtor or the business. And after that, the creditor is contacted.

A bankruptcy judge sits as a decision-maker in the court. He decides whether a debtor is qualified to file a petition. Sometimes, the debtor’s valuable assets are used to clear a part of the debt. Eventually, a debtor is free only when the proceedings are complete.

Filing for bankruptcy affects a business. It wounds a business’s credit and the effect can last for a while.

Depending on the type of bankruptcy filed, a business’s assets can be used to settle the debt or under the monitoring of the court, they could be placed on a repayment plan till all the debts may have been settled.

Types Of Business Bankruptcy

The main types of business bankruptcy are liquidation, reorganization, and adjustment of debts. Bankruptcy filing costs differ depending on the type of bankruptcy filed.

Similarly, bankruptcy proceedings are marked as complete depending on the type of bankruptcy a business files.

Companies may face financial distress if they do not repay debts immediately after they are due. Also, a company can be financially unstable if they do not cut down on unnecessary expenditures. The types of bankruptcy include:

Chapter 7 (Liquidation)

When a business files for liquidation, its assets and properties are usually sold to pay off the creditor. Sometimes businesses that do not possess any asset may end up repaying no part of the debt.

However, debts like child support or debts to the government are not discharged. This business bankruptcy does not require a repayment plan like Chapter 13.

Chapter 11 (Reorganization)

A business that files for Chapter 11 has the aim of remaining in business. Businesses reorganize their strategy, reduce costs, and spread their wings to increase revenue.

Businesses may offer more services and get more streams of income to pay the creditors. They work with a repayment plan to pay creditors.

Chapter 13 (Adjustment of Debts)

Businesses that file for Chapter 13 adjust the payment of debts. Most times, these businesses have a stable source of income that enables them to pay up debts.

The debtors pay the creditors in installments for 3-5 years. Unlike Chapter 7, businesses can keep their valuables.

How To Prevent Business Bankruptcy? 

To prevent business bankruptcy, a business must act fast at the littlest signs of insolvency. To prevent bankruptcy, businesses should keep accurate financial records. It doesn’t hurt to double-check records and make sure that they are duly completed.

Also, a company should pay debts as soon as they are due. Never allow a pile-up of debts. Payment of debts should come first before getting loans.

A business must also cut off unnecessary expenses like planning high-profile events.

How To Deal With Business Bankruptcy?

Here are some ways to deal with business bankruptcy.

Reassessment Of Financial Reports And Structure

Any business can go bankrupt if the financial reports and records are not accurate. To deal with bankruptcy, reassess your financial records and every piece of information if it was correctly entered. You may probably find an error somewhere.

Renegotiate With Creditors

Summon the courage to renegotiate payment of debts with your creditor. Even if repaying may take longer than before, it is better to pay up than never to pay. To renegotiate with creditors, you must be honest with them.

Provide your creditors with your financial reports, and statement of account, and offer ways you intend to pay back. Renegotiation is quite better than opting to file a business bankruptcy in court.

Develop A Recovery Plan

As a business, you must develop new plans to increase revenue. Check for where it got wrong and invent a new strategy. To increase revenue, you can increase sales or get other sources of income.

A business can also decide to change its management. Business management plays a crucial role in the overall success of any business.

Work With A Bankruptcy Attorney

If your business is on the verge of running bankrupt, contact a bankruptcy attorney. The first action of a bankrupt business is filing for bankruptcy in court but there are usually alternatives.

A bankrupt attorney can guide you by reviewing all other options and then deciding if filing for bankruptcy is the best.

Seek Financial Aid

Seeking financial aid is a great way to fix a bankrupt business. Both private and federal government firms can offer financial assistance to any bankrupt business. Seeking financial assistance can also revive your business and keep it on its feet.

Consider Assets Sales And Liquidation

Do you have any valuables you don’t need anymore? Why not sell them? Maybe you’ve got an old appliance in the store that you barely use, you can sell it off. Or maybe you have a space, you can rent the space out. The money actualized from selling off assets will go a long way in keeping your business afloat.

Conclusion

Finding the causes of business bankruptcy is the first step in finding solutions. A business that fails to keep proper records of its financial accounts may likely run bankrupt. Business bankruptcy could occur when a business spends too much on non-essential expenses.

To find bankruptcy solutions, a business can renegotiate repayments of debts with its creditors. This solution is better than wasting time, money, and effort in filing for bankruptcy in court. Similarly, a business can also streamline its source of income and increase revenue to keep the business afloat.