Insolvency of companies can brought about by huge debts, mismanagement and current economic trends. This is the underlying rationale for applying for business bankruptcy.
Bankruptcy is a process by which businesses and individuals are given the chance under the federal court to get rid of debts or to repay debts under the protection of the bankruptcy court. A declaration of bankruptcy simply means that the business is incapable of paying his creditors.
A business declaring bankruptcy may opt for the chapter 7 where unsecured debts are removed or abolished to give the business a chance to start anew and to start the financial recovery. Chapter 13 on the other hand, provides a plan to pay secured debts.
Chapter 7 bankruptcy is also known as the total bankruptcy. It will stay in the credit report for 10 years and filing will be done only once in an eight year period. In essence chapter 7 is the easiest way to take if you want all your unsecured debts to be removed.
Chapter 13 is like a payment plan where you get to keep all your assets with the stipulation that the debts will have to be paid in three to five years time and with the amount determined by the court.
Just like any other option, the filing of bankruptcy does have several disadvantages. The filing of bankruptcy necessitates the hiring of attorneys who will present your case. Attorney fees and litigation costs can be both financially draining and time consuming. The business will have to shell out money it can ill afford. Because the court controls the assets, the chance of improving the business is lost thereby losing the chance to earn the much needed profits. Mortgages after bankruptcy will demand higher interest rates due to the fact of the business’ being a high credit risk. Additionally, bankruptcy will not absolve the business from paying backlog taxes.
Because of these drawbacks, filling for bankruptcy is not sensible. Enlisting the help of debt counselors is a more viable alternative. Through the consultation with creditors, a mutually agreed restructuring of business debts can be made. With proper counseling of the debt counselors, a repayment plan that will benefit both the borrower and the lender will be established. With the counselor’s intervention, the monthly installments may be lowered. This will greatly help the business to get out of the burden of debts faster and will help in the attainment of financial stability.
Filing for bankruptcy is a serious major decision. Of course it will provide businesses a chance to continue running the business, a fresh financial slate by eliminating debts so that the business is no longer liable to pay or by introducing a more reasonable repayment plan under the decision of the bankruptcy court.
A large number of businesses are taking the bankruptcy option everyday. Some are due to irresponsible financial attitude; others are forced to take the option as a solution for unfortunate circumstances. Whatever the cause, bankruptcy should not be treated as a way to run from financial responsibility but rather as a tool to attain business profitability and to regain financial health.