Many businesses consider filing for bankruptcy when they can no longer pay their debts. Doing so can stop lawsuits and collection calls, saving business owners from a bigger financial consequence.
However, declaring bankruptcy requires strategic timing. Otherwise, you might lose your business assets without improving your financial situation. As a general rule, the right time to file for bankruptcy is when the business is unsalvageable and your personal assets are at risk.
When Is it Time to File Bankruptcy?
Entrepreneurs who are in a sole proprietorship face the most risk of losing their personal possessions to business debt. Because they run the company alone, they’re liable for all the mistakes and debts of the business.
If you’re in this situation, your personal assets could be at risk from creditors and judgments. You don’t want your finances to suffer if your business does tank because you’ll only face a much bigger predicament. In this case, declaring bankruptcy is the smartest choice.
On the other hand, S corporations and limited liability companies (LLCs) don’t need to file bankruptcy right away. LLCs protect the members’ personal assets, so the owners’ assets are untouchable even if the business goes under.
It’s best to consult with a corporate or business attorney to explore your options. If there’s any other way to save the company, you won’t have to declare bankruptcy.
Alternatives to Bankruptcy
If the company is drowning in debt, the first thing you should do is to prioritize the debts. Then, consider all alternatives. Depending on your situation, here are some options that can help save the business:
1. Refinancing your debt
Refinancing your debt is a smart option if the current interest rates are lower than when you first applied for the loan. The refinanced loan will pay off your original debts, easing your financial burden.
When you refinance your debt, try to get a loan with lower monthly payments, even if it means spreading them over a longer time period. This will make it easier for you to meet monthly deadlines, preventing you from falling into debt again.
2. Consolidating your debt
Debt consolidation is an effective way to limit and manage your debts. It works similar to refinancing in that you take out a new loan to pay off your existing loans. However, it doesn’t pay off your debts. You’re only combining all your debts into one payment, making it easier to manage.
Consolidating your debt can potentially give you lower monthly payments and interest rates, depending on your credit score and the number of active loans you have. It can also give you more time to repay what you owe by spreading the payments over a longer period, just like with refinancing.
Note that these two options are only viable if you have the financial capacity for a new loan. If you’re just delaying the inevitable and acquiring more debt, it may be time to declare bankruptcy.
Owners of LLCs who can no longer save their business can file for a Chapter 7 bankruptcy to liquidate their remaining assets.
If you decide to declare bankruptcy, there are still ways to revive the business. Regain your credit score, secure funding, and improve your business model, then you can bounce bank after insolvency.