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Warning Signs You Might Be Headed for Bankruptcy (Business)

Filing for bankruptcy could provide a viable solution for debt relief and a fresh financial start for your business, but careful analysis and planning are of upmost importance when faced with this situation. Outlined in this blog post are different chapters of bankruptcy as well as some of the different warning signs signaling that your company may be headed in that direction. These indicators, coupled with a hard look at your company’s policies and practices, will help determine whether filing for bankruptcy is the best option for you. 

Warning Signs 

Recent historic trends demonstrate the level of bankruptcies often strongly correlate to the GDP growth in the United States. It is important for business owners and executives to be aware of early warning signs that their company could be in financial trouble. These signs include:

  • Continued decreases in cash flow
  • Low cash or capital balance
  • Departure of key management or employees
  • Inability to meet debt obligations such as loans and lease payments
  • Key debt covenants are, or are soon to be, breached
  • Difficulty meeting payroll
  • Increased interest rates on credit cards due to late payments
  • Consistent calls from creditors
  • Company executives considering injecting more personal money into the business to satisfy debts or payroll

If, after seeing any of these warning signs, the situation becomes untenable from a financial perspective, there are a variety of bankruptcy solutions that can help companies. 

Types of Bankruptcy 

There are six primary forms of bankruptcy:

Chapter 7: Formal Bankruptcy(Liquidation

An orderly, court-supervised procedure during which a trustee takes over the assets of the debtor’s estate, reduces them to cash, and makes distributions to the creditors.

Chapter 9: Adjustment of Debts of a Municipality(Cities, Towns, Counties)

Provides for reorganization, much like those under Chapter 11 (below).

Chapter 11: Reorganization

Commonly used by commercial enterprises hoping to continue operating a business and repay creditors concurrently through a court-approved plan of reorganization. 
Subchapter V could help your small business survive COVID-19

  • Prior to the Small Business Reorganization Act (SBRA) enactment, many financially distressed small businesses consulted with bankruptcy lawyers only to be informed that they were “too poor” to file under the“traditional” Chapter 11 bankruptcy. 
  • In 2019, Congress went back to the drawing board and enacted the SBRA, creating subchapter V of Chapter 11 of the U.S. Bankruptcy code, entitled “Small Business Debtor Reorganization.” This subchapter adds new and additional features intended to make Chapter 11 more accessible and practicable for small businesses. Read more on our blog.
Chapter 12: Adjustment of Debts of a Family Farmer or Fisherman

Provides debt relief, allowing farmers and fisherman to repay debts over a period of time while continuing to operate the business.

Chapter 13: Adjustment of Debts of an Individual

Enables the debtor to keep valuable property and propose a plan to repay creditors over time. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. 

Chapter 15: Ancillary and Other Cross-Border Cases

Deals with cases of cross-border insolvency. 

We’re Here to Help 

To learn more about how to navigate and expect a potential bankruptcy, contact us to schedule a free consultation with one of our skilled attorneys. We are more than happy to assist you with any and all of your legal needs.

At the law offices of Bauer Gutierrez & Borbon, PLLC, we pride ourselves in offering dynamic, creative, efficient, and cost-efficient services and solutions to individuals and businesses of any size. Particularly for small businesses and small business owners, we hope you find this information useful and informative. 

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