Weighing the Pros and Cons of Bankruptcies in Business

It is normal for businesses to take on significant debt when they begin. However, getting out of debt can be an enormous task, especially when unprecedented global and national economic pressures emerge. Over the past few years, increasing numbers of businesses have considered declaring bankruptcy. While filing for bankruptcy can offer relief, it is worth asking, “What is the downside of filing for bankruptcy?” Declaring bankruptcy is one of the most consequential steps you can take for your business. As such, it is critical that you thoroughly understand the pros and cons of bankruptcies before making a final decision.

Why Do People File Bankruptcy for Their Businesses?

Businesses often file for bankruptcy when they cannot pay their debts and need protection from creditors. Some common reasons for filing include:

• Cash flow problems – When a business struggles to generate enough income to cover expenses and debt payments.
• Overwhelming debt – If a company has taken on too much debt and cannot keep up with payments.
• Lawsuits or judgments – If a business faces significant legal liabilities that it cannot afford to pay.
• Economic downturns – During recessions or industry-specific slumps, businesses may see reduced demand and revenue, making it difficult to stay afloat.

Filing for bankruptcy can give businesses a fresh start by allowing them to restructure debt, negotiate with creditors, and potentially eliminate some obligations.

Bankruptcy Pros and Cons by Type

There are several types of bankruptcy available to businesses, each with its own advantages and disadvantages. The most common types are Chapter 7, Chapter 11, and Chapter 13 bankruptcies. Let’s examine the pros and cons of each:

Pros and Cons of Filing Chapter 7

Pros:

• Allows for the liquidation of assets to pay off debts
• Can eliminate most unsecured debts
• Relatively quick process, usually completed within 4-6 months

Cons:

• Businesses must cease operations and close permanently
• Owners may lose personal assets if they have pledged them as collateral
• Negative impact on credit scores of owners and the business

Pros and Cons of Filing Chapter 11

Pros:

• Allows the business to continue operating while restructuring debt
• Provides a chance to negotiate with creditors and develop a repayment plan
• Owners can retain control of the business

Cons:

• Lengthy and complex process, often taking several years to complete
• Expensive, with high legal and administrative costs
• Requires detailed financial reporting and court oversight

Pros and Cons of Filing Chapter 13

Pros:

• Allows the business to retain assets and continue operating
• Provides a structured repayment plan to pay off debts over 3-5 years
• Can help protect the personal assets of owners

Cons:

• Only available to sole proprietorships, not partnerships or corporations
• Requires regular payments to a trustee for the duration of the repayment plan
• May not eliminate all debts, and some must be paid in full

Alternatives to Filing for Bankruptcy

When you consider filing for bankruptcy, if the cons outweigh the pros, you might wish to consider the following alternatives:

• Negotiating with creditors – If you have a small number of loans that you are unable to pay, you might be able to negotiate with your creditors for a reduction of debt or interest rate charges. Alternatively, they might be open to granting you a more favorable repayment arrangement.
• Extending the length of your loan – If your creditor is open to doing so, you might be able to extend your loan, which can reduce the amount of your monthly repayments.
• Considering whether the value of your collateral has increased – If you have collateral on a secured loan and its value has increased, you might be eligible to reduce the balance.

These options can offer short-term relief while reducing your chances of incurring some of the long-term adverse consequences of bankruptcy.

Contact an Experienced Business Bankruptcy Attorney Today

Is filing for bankruptcy bad for your business? Not necessarily. In fact, it might be the only way to keep your company’s doors open. However, it is essential to consider the consequences before taking this significant step. Working with an experienced Raleigh business bankruptcy attorney can help you understand what you need to know about what bankruptcy might mean for your business’s future.

For over 30 years, the seasoned business bankruptcy attorneys at Bradford Law Offices have helped many North Carolina businesses regain financial stability. Let us put our experience and knowledge to work for your business. Call our law firm today at (919) 758-8879 or contact us online for a confidential consultation to learn more about how we can help you.

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