Bankruptcy is a term we hear all the time, whether it be for a person or a business, it’s a serious matter. Bankruptcy is the legal process of an individual or business not being able to pay their debts. Once someone decides to file for bankruptcy, a petition is filed, usually by the debtors and their assets are evaluated to see which can be liquidated.
Bankruptcy gives individuals and businesses a chance to start fresh by forgiving their debts that cannot be paid anyway, and allows them a chance to avoid repossession and lawsuits. There are several different types of bankruptcy, named by chapter to differentiate between them.
Chapter 7 Bankruptcy
Businesses with little to no assets file this chapter of bankruptcy. This allows individuals to dispose of their unsecured debts, such as credit cards and medical bills. Consumers who have no valuable assets and only exempt property, such as household goods, clothing, tools for their trades and a personal vehicle up to a certain value, repay none of their unsecured debt.
Chapter 11 Bankruptcy
Businesses often file Chapter 11 bankruptcy, which allows them to take time to get things together and start making profits again. Filing Chapter 11 allows a company to create plans for profitability, cut costs and find new ways to increase their revenue. This can mean rewriting the business plans, revenue models, and adjust services and prices. This type of bankruptcy allows businesses to continue conducting its daily operations, while working on repaying their debts.
This is what fashion brand we all love Nasty Gal filed, early this month to gain security in their finances, while they restructure. Although founder of the brand Sophia Armoruso stepped down from being CEO last year, she will now be resigning from her role as executive chairwoman and even some of their investors will be leaving the board.
Chapter 13 Bankruptcy
Those who earn too much money to qualify for Chapter 7 bankruptcy file under Chapter 13. This allows individuals and businesses to create debt repayment plans and they get to keep all of their property, including nonexempt property.
How to avoid bankruptcy in small business:
Stay Liquid: If you have enough cash, there is no reason why your business should tank. With that in mind, be very careful if you are planning on taking on any investors, who may want to make changes to the business. This holds true in the Nasty Gal case, which is why one of their investors will be stepping down.
Make changes to management: When large corporations are having major issues and losing money due to them, we should always look to see who is in charge. The people in upper management should be held accountable and there needs to be room made for new ideas and new employees to take charge.
Assignment for the benefit of creditors: This is one way businesses avoid having to file for bankruptcy at all. Filing for ABC means that you are liquidating the business if it is no longer serving enough customers and isn’t bringing in enough money. Going down this route, as the name insists, allows for creditors to gain as much as possible from the business ending.
Have you or a friend ever faced bankruptcy, in personal finances or in business? How did you pull through?