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3 Ways to Benefit from Business Bankruptcy

While bankruptcy can negatively affect your credit and overall business outlook, there is some silver lining for small businesses.

If your company is unable to keep up with debt payments, and you’ve exhausted all resources to try to hold your business together, bankruptcy may be the best remaining option. Bankruptcy certainly isn’t anything to take lightly, so make sure you explore other possibilities before heading down this route:

  • Will my vendors accept a modified payment schedule that I can afford?
  • Will my bank extend more credit to my company?
  • Can we sell assets for readily available cash?
  • Can we lay off people who aren’t necessary right now?
  • Have we spoken to a credit counselor about consolidating our debt?

Any of these possibilities is better than bankruptcy, but in some situations, bankruptcy is the way to go. Remember, too, that there are some benefits to filing business bankruptcy.

1. Fresh Start

If your company has been drowning in debt for years (as many have since the beginning of the latest recession), it can be a relief to start anew. Any bad business decisions that you or a previous owner made will be wiped away, and the business can re-start on the right foot. Important tips to remember:

  • Don’t incur credit card debt
  • Pay all vendors and creditors on time
  • Maintain enough cash flow to pay expenses in a timely manner
  • Examine all business costs and attempt to lower expenditures
  • Find new clients to increase revenue

2. Priority Creditors Get Paid

Per bankruptcy laws, the priority creditors are paid first. If your business has a long-standing relationship with a creditor, you may be able to maintain the business relationship. Finding new suppliers after bankruptcy can be difficult, so do what you can to salvage existing relationships, and remind creditors of all the times you paid on time in the past prior to your financial difficulties.

3. Chance to Restructure

If the way you were running your business before wasn’t working, bankruptcy can be the opportunity to take a long, hard look at the organizational structure. Reconsider budgets, staffing and product lines, and streamline for best success. It may be painful at first, especially if you have to lay off staff, but in the long run, bankruptcy might be the best course of action.

Chapter 11 versus Chapter 7 Bankruptcy

If your business needs a fresh start, file for Chapter 11 Bankruptcy. This allows you to reorganize your company and start again, with some guidance from your bankruptcy judge. You can continue to operate and take in money under Chapter 11.

Chapter 7 Bankruptcy is a last resort. In this case, all business assets are sold to pay creditors, and your business as it exists is finished. If you don’t see any future profits for your business, even with a reorganization, consider Chapter 7 bankruptcy.

Avoiding Bankruptcy Altogether

No business owner wants to file bankruptcy, so try to be proactive in operating your company and handling finances responsibly. Recessions happen, and small businesses suffer. Remember to have money in reserve to pay bills if your customers don’t pay you on time. Stick to your budget and revamp it if you have less revenue coming in. Avoid the use of credit unless you have a stringent plan to pay it back.

If your business is in a difficult spot, talk to a credit counselor first. It’s possible that some of your creditors will be willing to reduce the amount that you owe them in exchange for placing you on a regimented payment plan. If you and your business are beyond this point, speak to a bankruptcy lawyer about your options.

 
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