When is it time to declare bankruptcy?

This article looks at how business owners can know whether their situation merits bankruptcy.

Bankruptcy is an option of last resort for struggling business owners. For those who are having trouble making loan payments or keeping their business afloat, bankruptcy may eventually become the only option. However, knowing when it is time to declare bankruptcy can be difficult. In some cases, a business may simply be going through a rough patch that it can eventually recover from. In other cases, business owners may delay initiating bankruptcy proceedings because they worry that by doing so they will be viewed as a "failure." The following is a look at how business owners can know when it may be time to take the first steps towards declaring bankruptcy.

Is the business unprofitable?

Chances are if a business owner is entertaining the notion of bankruptcy then his or her business is having trouble turning a profit. However, being unprofitable is not a reason in and of itself for a business owner to declare bankruptcy. Plenty of businesses go through periods where they do not turn a profit. If those periods, however, begin dragging out to the point that the owner has to repeatedly dip into his or her personal savings to keep the business afloat, then it may be time to consider bankruptcy.

Personal liability

Personal liability can be an important factor in considering business bankruptcy. If the business is a sole proprietorship or partnership, then the owner can be held liable for business debts. If the company is incorporated, then the shareholders and directors are generally protected from creditors. However, there are exceptions to this general rule, and it is important to discuss liability issues with a financial advisor and lawyer early on. Personal liability issues often drive decision-making regarding bankruptcy.

Are there any alternatives?

Bankruptcy becomes a serious option when a business' liabilities outweigh its assets. However, if the business' assets still make it valuable, then selling those assets, or selling the business outright, may be the best outcome for the business' creditors and its owners.

Business owners should also consider other alternatives before declaring bankruptcy. Restructuring the business, creating a "Proposal" under federal insolvency legislation, or even looking into potential government grants and aid, are all alternatives that might help a business get back on its feet.

Bankruptcy law

For businesses that are struggling to stay afloat, it is important to understand what options are available. Bankruptcy may sound frightening, but in many cases it could be a necessary step towards getting back on sound financial footing. A bankruptcy lawyer can advise business owners about what bankruptcy entails and whether it may be a worthwhile option. in their situation.