When a Business Becomes Bankrupt
A business becomes bankrupt when it cannot pay all its bills. In other words, its cash flow is not now, or in the future, going to be able to pay off all the business's creditors. Usually bankruptcy is declared when the business's financial situation seems hopeless. Some businesses wait too long to file and end up having the creditors impose involuntary bankruptcy on them. In other cases, one or more creditors may try to impose a lien on assets that the business's owners must pay, such as taxes or creditors may be threatening to require owners to personally guarantee debts of an incorporated business.
How Do You Know You Should File Bankruptcy?
Bankruptcy should be a last resort for any person or business. Before you take the step of filing that bankruptcy petition, consider:
- Talk to banks and the Small Business Administration to see if you qualify for an emergency loan.
- See if you can borrow from family or friends.
- Work with creditors on repayment plans. Some might be willing to work with you if they have some assurance they will get their money back.
- Talk to your CPA to see if there are ways to cut costs and stretch your cash.
- Talk to a bankruptcy attorney about the types of business bankruptcy and which might be best for you.
Bankruptcy doesn't have the same negative effect on businesses as it does on individuals; in some cases, companies can emerge from bankruptcy stronger and leaner. But business bankruptcy is still a lengthy, expensive, and emotionally draining experience, one you don't want to undertake unless it is absolutely necessary.
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