Signs Your Business Might Need To File For Bankruptcy

By Author: Harold Sterling
Total Articles: 1
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When we think of bankruptcy, the first thing that comes to mind is losing all that cash, our assets being sold, and closing down our businesses. But it's not just about the financial performance.
For small business owners, bankruptcy is a big concern, and it can happen due to many reasons beyond our financial records. It may manifest even in the behavior of our employees.
If you think your company is heading toward bankruptcy–or want to protect your business from it–read on. In this article, we will guide you on the typical red flags indicating you might need to file for bankruptcy soon.
Introduction to Bankruptcy
Bankruptcy is a legal process that helps business owners deal with their overwhelming debts. Companies may file for bankruptcy as a last resort to save their business or get a fresh start.
There are three common types of bankruptcy. These are called Chapter 7, Chapter 13, and Chapter 11, referring to their names in the Bankruptcy Code.
Chapter 7 - Liquidation Bankruptcy
Under Chapter 7, known as liquidation bankruptcy, debtors sell assets to a trustee. This helps pay ...
... off debts and allows them to be free from those debts. Business owners can choose the Chapter 7 route, especially if they want to manage the impact of shutting down their companies.
Chapter 11 - Reorganization Bankruptcy
You might have seen reports about big companies facing Chapter 11 bankruptcy. It's known as the 'most complex' type and involves reorganizing debts and operations while keeping the business afloat.
What to know before filing for bankruptcy?
Filing for bankruptcy takes time, effort, and even costs. This is why it's best to get help from credit counselors and bankruptcy lawyers, as they can guide you effectively.
There are hundreds - if not thousands - of bankruptcy lawyers out there, and choosing the one best suited to your situation is crucial.
As bankruptcy can be on a case-by-case basis, it is important to have a bankruptcy counsel who knows your needs and provides you with realistic solutions like Kevin S. Neiman from Denver, Robert A. Eder, Jr. from Utah, Steffens Law from Kansas, and McCook Law Firm from New Mexico.
Signs
Poor financial management
Bankruptcy usually begins when a company faces insolvency. Common causes include poor cash flow, too much inventory, and excessive debt. Poor financial management is also the most common reason why companies go to the bankruptcy court.
High turnover of employees and top management
Sometimes, the high turnover rate of your staff and managers can be an indicator that your business might be struggling. When people leave the company, it impacts productivity, operations, and costs. If not addressed, it could even lead to bankruptcy.
Changes in customer behavior
Customers bring in money for all types of business. If you notice more complaints or a drop in revenue, it may mean your customer base is shrinking. Ultimately, it can be a clear sign of financial trouble or, worse, bankruptcy.
External factors
In several instances, businesses file for bankruptcy because of factors they can't control. For example, during the Covid-19 crisis, many companies faced a sharp decrease in profitability due to lockdowns. As a result, they turned to bankruptcy court for help. Most recently, supply-chain issues worldwide have also prompted businesses to declare bankruptcy.
What to do if bankruptcy signs show up
If you think your company has all these signs, do not panic. Bankruptcy can be frightening, with effects that may last for years, even after debts are restructured or wiped out.
For savvy business owners, making the right and informed decisions to address these challenges is crucial. You can start by gathering insights about your company's financial health or asking your managers and workers how they are holding up. These will help you come up with an effective plan that includes whether your business needs help from the bankruptcy court.