In September 2024, the Administrative Office of the US Courts reported that annual bankruptcy filings reached 504,112, an increase from 433,658 the previous year. Filing for bankruptcy is a serious issue, particularly for businesses facing overwhelming debt.
Steele Law Firm says once you qualify, you can enjoy the immediate advantages, such as halting foreclosure proceedings and being able to stay in your home, relief from creditor harassment, stopping wage garnishment, pausing IRS collection efforts, and the chance to reclaim your repossessed vehicle. However, it can also impact your credit rating, business reputation, and future borrowing ability.
In this blog, we’ll explore the advantages and disadvantages of declaring bankruptcy, helping you make an informed decision about whether it is the right path for your business.
Advantages of Declaring Bankruptcy
If your business is financially struggling, declaring bankruptcy can stop creditor harassment, lawsuits, and wage garnishments. Depending on the type of bankruptcy, you might have the chance to eliminate some or all of your debts, providing a fresh start, which can be helpful for businesses struggling with unmanageable debt.
For instance, Chapter 11 bankruptcy provides a way for businesses to reorganize their debts and operations. This process involves creating a plan to repay creditors while still being able to operate, ultimately helping the business to come out stronger and more sustainable.
Bankruptcy can help safeguard vital business assets, enabling you to keep your operations running and protect the value of your business. Stopping debt repayments and working out new terms with creditors can help your cash flow and give you the financial space you need to get your business back on track.
See also: Insurance Glossary: Terms and Definitions for Business Owners
Disadvantages of Declaring Bankruptcy
While there are benefits, filing for bankruptcy can also bring some drawbacks. Your credit score, primarily, will be negatively affected. Your reputation among lenders, suppliers, and even customers can be put at risk, affecting your ability to conduct business. You may be perceived by lenders as a higher-risk borrower due to the bankruptcy, leading to limited credit options or higher costs associated with borrowing. It will require time and effort to rebuild your credit score after bankruptcy.
Another disadvantage is that not all debts may be dischargeable through bankruptcy. Certain obligations, such as taxes, student loans, and child support payments, are not exempted through bankruptcy proceedings. Declaring bankruptcy also has a domino effect on any co-signers or guarantors on your debts, potentially leaving them responsible for the outstanding balances.
And also, you may be required to liquidate assets to pay off creditors, which can mean losing valuable business property. Additionally, the process of bankruptcy can be lengthy and complex, requiring significant time and legal costs, which can add to the financial strain you’re already experiencing.
Remember, while bankruptcy can provide a fresh start, it comes with significant downsides that should be carefully considered. Seeking professional advice is crucial to weigh the pros and cons based on your specific situation.
Conclusion
While bankruptcy offers a fresh start for your business, it’s important to consider the potential impacts, such as a diminished credit score and loss of assets. Weighing the advantages and disadvantages carefully and consulting with a bankruptcy lawyer can help you make an informed decision that best supports your business’s financial stability.
