Operating a business is no walk in the park. It requires proper management in order to operate smoothly. Profits should also cover all the overhead costs and other business expenses incurred. Otherwise, there is no reason to continue the venture.
Handling a business’ finances is a difficult job as it requires extensive management and planning skills. Failure to maintain a stable cash flow as well as prepare for any emergency costs will lead to business failure and bankruptcy. It is never easy to file for bankruptcy; however, it may be an option in order for you to get a fresh start.
Businesses Filing for Bankruptcy
From 2015 to 2017, the number of businesses that filed for bankruptcy steadily increased in the United States. 29,978 businesses went bankrupt in 2015, while 38,062 businesses filed for bankruptcy by the end of 2017. The numbers are quite significant, and if you are a business owner, you should assess your business to avoid suffering the same fate as those who went bankrupt.
Why Businesses Go Bankrupt
No business owner wants to file for bankruptcy. It is difficult to do because you are letting go of something you worked hard to build. It is important to determine why businesses go bankrupt to learn from their mistakes.
These reasons are:
- Failure to adjust to different market conditions. Consumer behavior as well as market conditions are never constant. They change over time and businesses should be able to adapt to those changes to be able to survive. Constantly meeting the needs of your target market is required to be successful in an innovative and competitive world.
- Poor decision-making skills. If you keep getting the wrong clients or you keep on entering business deals without thinking things through, you will regret them in the future. Avoid making rash decisions in order to minimize uncalculated risks.
- Mishandling of business finances. Spending too much, incurring too much debt and failing to generate enough profits for your business are some of the common examples of mishandling your business’ money. If you spend too much without looking at your revenues, you have a high chance of going bankrupt. Lack of capital is also a factor when it comes to finances. A business that operates on low capital may not be able to fund every operation. In the end, its business operations will cease due to lack of funds.
In order to minimize your risk of going bankrupt, it is important to learn from these mistakes.
Is Bankruptcy the Best Option?
Getting buried in debts is one of the most common reasons why people as well as business file for bankruptcy. If you are one of the unlucky few that has trouble with your finances, bankruptcy may be the only option for you. However, before you start filing, it is best to understand the following:
1) Bankruptcy qualifications. Not everyone can file for bankruptcy. Certain measures and requirements are imposed in order to avoid making bankruptcy an easy way out of paying debts. To be able to qualify to file bankruptcy you should:
- Have no previous outstanding debts forgiven due to bankruptcy.
- Have an income that is not too high or low.
- Have no bankruptcy cases within 180 days.
2) There are two common types of bankruptcy:
a) Chapter 7 Bankruptcy – This is also called “liquidation bankruptcy” because your assets can be liquidated through court-appointed trustees. The proceeds are used to pay your creditors. You are allowed to keep your key or major assets such as your car and a part of the equity of your home.
b) Chapter 13 Bankruptcy – Also called “reorganization bankruptcy,” this kind of bankruptcy allows you to restructure your assets and finances. It enables you to pay off your debts and the others are forgiven. There is a minimum debt amount required for this kind of bankruptcy.
3) Be ready for what you will lose. You have to be mentally prepared for the fact that you will lose most of your assets. This will leave you with almost nothing. If you are not ready to accept this fact, it is best to find other options to pay off your debt.
4) Credit trace. Filing for bankruptcy will damage your credit score for years. If you file for Chapter 7 bankruptcy, the record will stay for up to seven years, while Chapter 13 bankruptcy will stay on your record for at least ten years.
5) Consequences. You may have a hard time getting new credit for 2 to 3 years because of your record. You will also find it difficult to rent an apartment or a house. In addition, your insurance premiums might increase as you are now viewed as a risk.
Bankruptcy is a solution and not an escape. If you are ready for the process and the consequences of bankruptcy, you may choose this option. If you succeed in filing, it is always important to remember to avoid making the same mistakes and start anew.
Gail Wilson has more than 12 years of experience under her belt when it comes to business, which she is currently sharing with her clients and peers as part of the law industry. She writes pieces on various law topics that she hopes could help the common reader with their concerns. A family oriented, Gail loves spending time with her husband and two sons during her free time.