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Warning Signs a Business Needs to File for Bankruptcy

As of April 2021, about 200,000 United States establishments found themselves closing due to the pandemic and the recession that followed. Many small and mid-sized businesses could not pivot because not many of them had the resources to combat the effects of the global health crisis and the toll it took on consumers.

Now more than ever, business owners and aspiring entrepreneurs need to have a grasp on the clear-cut and warning signs that a company or establishment is in trouble. Here are some warning signs that a business needs to file for bankruptcy.

The company is experiencing severe cash flow issues

If a business is experiencing the following:

  • Cash flow continues to decrease.
  • Capital balance or cash is running low.
  • Meeting payroll is becoming more difficult every month.
  • Debt covenants are about to be breached.
  • Unable to pay debts and meet financial obligations such as lease payments and loans.
  • Experiencing increased rates on their credit cards because of late payments.
  • Receiving consistent calls from creditors.
  • Business owners and executives are considering injecting their personal money to keep the company afloat.

These may be warning signs that it’s time to consult with a lawyer to file for a Chapter 7 or Chapter 11.

The owners are receiving foreclosure letters and warnings

While foreclosure laws vary from state to state, one common thread is that creditors have to warn the business owners about the possibility of foreclosure. When this happens, business owners and managers will do well to consult with a lawyer to help them prevent experiencing foreclosure, especially if they need more time to get caught up on their payments.

In this situation, filing for bankruptcy might be the best financial strategy because it can help business owners save their properties, especially if there is a relief called Automatic Stay in their state. Once a business owner faces the threat of foreclosure, immediately contacting a lawyer specializing in this field is the best option.

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The company is running out of options

There are plenty of actionable steps that can be taken to save a company in trouble:

  • The owners can take out loans to create enough revenue to pay off the remaining debts.
  • Business owners use their personal resources to create a positive balance sheet.
  • Apply for federal stimulus funding or relief.
  • Pay off the creditors or negotiate a new deal that will allow the company to pay off the debts in a new staggered payment scheme.

But suppose the owners and managers find that none of these steps are no longer viable. For example, taking out another loan would only cause more harm than good in the long run, or relief from the government is no longer available. In that case, bankruptcy of some form might be the only way out.

The owner’s heart is no longer in it

In some cases, a business can still be saved, no matter how dire the situation is. This is when Chapter 11 bankruptcy, or restructuring, can help. Chapter 11 is when a company will be allowed to continue to operate under the supervision of a trustee that was appointed by the court. The ultimate goal of this type of bankruptcy is to save the business, especially if it is still seen as something that might still be viable in the future.

But suppose the owners find that the business is truly no longer viable and there’s no future in which it can be. In that case, then Chapter 7 bankruptcy, also known as “liquidation” bankruptcy, is when the assets of the company will be liquidated to pay off the debts. When a company goes through liquidation, the following take place:

  • The assets are sold to pay back the lenders.
  • The business’s shareholders might be able to acquire a portion of the assets, according to what they’re entitled to if the company had an exit plan.
  • The business closes down.

This is why consulting with bankruptcy attorneys is crucial: Because they can provide clients with the options that are available to them. They can help business owners navigate the path that is most beneficial for them and their employees.

Some signs indicate that the company might only need to make some readjustments to get back on track, while some signs are more clear-cut and point towards bankruptcy. Business owners and managers would do well to stay up-to-the-minute on the company’s day-to-day progress, the state of the economy, and their consumers’ sentiment and relationship with the business—and study every possible path to ensure that they are taking the right one.

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