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When Should a Business Consider Bankruptcy?

The Law Offices of David K. Blazek, P.C. July 8, 2024

Judge hammer near bankruptcy documents on grey backgroundRunning a business is anything but easy. It comes with its highs, lows, and unforeseen challenges. But what do you do when the lows seem to outweigh the highs and financial struggles become overwhelming? When should you start considering bankruptcy as a viable option? 

While bankruptcy is certainly an option, whether or not it’s a good option depends on the circumstances your business finds itself in and what alternatives–if any–you have to rescue your debt-ridden company.  

The Tampa bankruptcy attorney at The Law Offices of David K. Blazek, P.C., provides tailored solutions to each client he represents. Over the past 20 years, the law firm has helped numerous individuals and businesses get a financial start. With an office in Tampa, Florida, the attorney serves clients in Orlando, Miami, and Jacksonville and several locations in Georgia: Atlanta, Columbus, and Macon.  

Signs Your Company Should File Bankruptcy 

Unfortunately, no matter how successful or unsuccessful, small or large, your business is, it may experience financial hardship at some point. However, instead of letting your company slip further down into an abyss with mounting debt, you should focus on improving your situation, even if it means filing bankruptcy. Below are some of the tell-tale signs that you–as the business owner–may need to consider bankruptcy as an option:  

1. Persistent Cash Flow Issues 

Cash flow is the lifeblood of any business. If your company consistently struggles to maintain a positive cash flow, it may be time to consider bankruptcy. Persistent cash flow problems can lead to a cycle of borrowing to cover expenses, which can only deepen financial woes. 

2. Increasing Debt 

Mounting debt that shows no signs of decreasing is another major red flag. If your company is continually taking on more debt to keep afloat and can't make sizable repayments, it's a sign that you're in over your head. Bankruptcy might be a solution to manage this overwhelming debt. 

3. Struggling to Pay Bills and Salaries on Time 

Are you constantly late on paying bills or employee salaries? This not only impacts your business reputation but also causes employee dissatisfaction. The inability to meet financial obligations timely is a critical indicator that bankruptcy could be on the horizon. 

4. Declining Sales and Revenue 

A steady decline in sales and revenue can spell disaster for any business. If your revenue streams are drying up despite your best efforts to revive them, it may be prudent to consider bankruptcy as an option to restructure and recover. 

5. Angry Creditors 

Unpaid debts lead to angry creditors and collection calls, adding stress to your already strained finances. When creditor pressure becomes unmanageable, bankruptcy can provide a legal way to pause these aggressive collection efforts and give your business some breathing room. 

How Much Debt Is Too Much to Consider Bankruptcy?  

One of the first steps in deciding whether to file for bankruptcy is assessing the amount of debt your business has. The amount in debt that signals it’s time to file for bankruptcy will be different for every business. As a rule of thumb, if the debt is several times your annual revenue and growing, it's likely too much to handle without taking drastic measures.  

Additionally, you might want to look at the ratio of your debts to your assets. If debts far exceed the value of your assets, it’s a strong signal that bankruptcy could be necessary. This comparison will help you understand the extent to which your business is financially underwater. 

Finally, consider your business's ability to repay the debt within a reasonable timeframe. If you have no realistic plan or means for repayment, and your financial forecasts indicate ongoing losses, then bankruptcy might be something to consider. If your situation doesn’t seem that bad but you have concerns over the downward trajectory in your sales and revenues and increasing debt, you might want to discuss your options with an attorney.  

What Does Declaring Bankruptcy Do to a Business?  

Filing for bankruptcy immediately halts all collection efforts from creditors. This automatic stay–one of the bankruptcy terms you need to become familiar with–offers temporary relief, allowing you time to reorganize your business without the constant pressure of debt collectors.  

Bankruptcy can also help restructure your existing debt into a more manageable plan. This can include lowering interest rates, extending repayment terms, or even reducing the principal amount owed. 

While bankruptcy offers solutions, it also comes with downsides. It can damage your business credit score, making it difficult to secure future loans. Additionally, it may result in the loss of some business assets, not to mention that the process can be lengthy and complex. The potential benefits and downsides of filing bankruptcy as a business depend on how high the debt amount is and what chapter you choose.  

Chapter 11 vs Chapter 13 Bankruptcy  

Businesses typically have two bankruptcy chapters to choose from: Chapter 11 and Chapter 13. Each has its own requirements and unique features:  

  • Chapter 11 is often referred to as "reorganization bankruptcy." It allows businesses to continue operating while restructuring their debts under a court-approved plan. This type of bankruptcy is typically used by corporations or partnerships.  

  • Chapter 13 is more common for sole proprietorships. It involves creating a repayment plan to pay off debts over three to five years. Unlike Chapter 11, it does not usually allow for the continuation of business operations as freely.  

The main difference between Chapter 11 and Chapter 13 lies in their scope and complexity. Chapter 11 is more suited for larger businesses with substantial debt and intricate financial structures, while Chapter 13 is more straightforward and ideal for smaller businesses with simpler financial situations. 

Small Business Bankruptcy 

Small businesses face unique challenges when considering bankruptcy. They often have fewer resources and less access to professional legal and financial advice, making the process more daunting. 

Fortunately, there are simplified procedures for small business bankruptcies under the Small Business Reorganization Act (SBRA). This act allows small businesses to file under a new subchapter of Chapter 11–Subchapter V–streamlining the process and making it less costly and complex. The choice of the debt relief option for a small business depends on the debt amount, your revenue levels, and whether you want to reorganize or liquidate. You might need a consultation with a bankruptcy attorney to learn about your best course of action.  

Considering Bankruptcy? Get Help Now 

If your business is continually grappling with overwhelming debt and your income sources keep drying up fast, you might catch yourself thinking, “That’s it. My business is done. I’m such a failure.

However, there may still be a chance to rescue your company if you act now. And one of your options may be filing for bankruptcy. Contrary to popular belief, bankruptcy is not the end. Rather, it’s a chance to get a fresh start.

Get tailored advice from a bankruptcy attorney at The Law Offices of David K. Blazek, P.C. The attorney with decades of legal experience can listen to your situation and explain the options that may be available to you to get out of debt and put your business on a path to profitability. Reach out today to request a consultation.