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BUSINESS BASICS CHANNELS 
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The Whats and Whys of Bankruptcy Your Chief Financial Officer calls you and says "That's it. We are out of money, we are being sued, and we have no choice but to file for bankruptcy." Those are the words every business owner dreads hearing. No one ever plans for bankruptcy, but there are occasions where even smart, decent business owners find that it's the only viable choice. Bankruptcy can result from economic conditions, local conditions and other events beyond your control, as well as mismanagement, mistakes or because of your own actions. If you are a sole proprietor or a partnership, your business' bankruptcy will mean personal bankruptcy as well. The term bankruptcy literally means "broken bench". In days gone by, when a debtor couldn't pay his bills, they would break his workbench in two as a warning to other tradesmen and to punish the debtor. Today, bankruptcy is a tool that can legally help your business to survive or allow you to discharge the business' debts. Bankrupty is the process of asking the court for protection from your creditors if you are unable to meet your obligations. Creditors can repossess equipment, refuse to sell to you anymore, and can even petition to force you into bankruptcy. Bankruptcy can be handled as a total liquidation of your business by which all assets are sold off and liabilities paid as cash allows. But other types of bankruptcies can keep the wolves away from the door while you try to work things out with your creditors. Filing for bankruptcy is not the only way out of a precarious position but should be considered a last ditch effort. If you can work out arrangements with your creditors without having to go to court, you are much better off. In court, all of your "dirty laundry" can be paraded for everyone to see, while the court oversees it all. Courts have the power to appoint a receiver to run your business and tell you what and who you can pay. So what is the best way to AVOID bankruptcy? First, know your financial position. It's worth knowing if you are insolvent. Insolvency simply means that your liabilities exceed your assets. Practically, it means that money isn't coming in fast enough to pay your debts as they become due. A key to survival if your business becomes insolvent is to catch it early and do not hide from the consequences. We recommend that companies always know their cash positions each and every day so that nothing will come as a surprise. At least every week, also review your current liabilities and any upcoming needs to meet long term payments. It is possible to survive a serious setback or general business downturn if:
In a situation where you are operating the business while it is insolvent or in bankruptcy, you can gain the cooperation of your debtors if they will make more money by working with you than against you. This will require a reorganization plan that will put the business on a solid financial footing. Businesses in bankruptcy often find it difficult to get additional investments, so you will want to work to keep investors and creditors informed and gain their active cooperation. If you have a strong reorganization plan and can demonstrate how you will be able to pay them back, they may extend additional cash or services to help you meet those goals. They are more likely to help in a case where you told them of problems as soon as you knew about them, and kept them regularly informed while the business was going well. That will increase their level of trust for you and your plan. And lastly, if you do file for bankruptcy protection, you are legally discharged from the debts by the corporation. Whether you have a moral obligation to repay the debts above and beyond what the court says you must pay is for each person to search out. If you pay debts you aren't legally required to pay, your creditors will probably be so shocked they will line up to do business with you. |
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