At what point should your business decide to file bankruptcy? How much debt is too much debt? These are good questions any struggling business should ask. Determining when to file is almost as important as determining whether to file.
If you wait too long to file, you may be unable to bounce back after the bankruptcy. While bankruptcy can take away many of your debts or help you reorganize them, it will not give you additional capital. You want to file at a time when your business has enough capital to survive post-bankruptcy.
Here are some signs that now is the time to talk to a bankruptcy lawyer.
1. Low liquidity
Take the time to gather your business assets and liabilities. Calculate you liquidity ratio by dividing your assets by your liabilities. Are you able to meet your current obligations? Low liquidity is a direct sign that you should start thinking about bankruptcy. Bankruptcy is not going to give you money, but it can help you reorganize in order to save the assets you do have and keep your business running.
2. Difficulty paying bills
Is your business having trouble paying its bills? Have creditors begun to knock on your door? Did you miss a few payments? It is best to make a plan the moment you know you will have difficulty paying your bills. Bankruptcy will stop creditor harassment, help you avoid bank levies and protect your business assets.
3. Mounting debt
Even if you are able to pay your debts, if they are increasing in number and at a speed beyond your control, you may want to consider bankruptcy. Unless you decide to liquidate your business assets, you will likely not be able to discharge all of your debts in bankruptcy. You can, however, reorganize your debts and reduce payments on some of them in order to help you become profitable again.
4. Difficulty making payroll
Do not wait until you cannot make payroll to file bankruptcy. If money is getting tight and you have begun to lay off employees or are considering it, take a moment to reflect on what your business needs to support employees and how you can achieve that. If reducing your debt will get you there, then you should consider bankruptcy.
Once you decide to file bankruptcy, your next step is to determine which Chapter of the U.S. Bankruptcy Code is right for you. If you believe you business is viable, Chapter 11 will allow you to create a repayment plan and negotiate with creditors to reduce the amount of debt your business faces and retain a positive cash flow during and after the bankruptcy. If you do not believe your business will be able to operate in the future, then Chapter 7 business bankruptcy might be an option to protect you from personal liability for business debts.