When a business can’t pay what it owes, it has to declare bankruptcy. The business will then be dissolved and its remaining assets used to pay what it owes.
Usually the business itself will file for bankruptcy. Then the business’ assets are evaluated and used to cover all or parts of what the business owes to its creditors. It’s also possible for the creditors to declare the business bankrupt, but it is less common.
Declaring bankruptcy can offer a fresh start for a business owner, as well as giving creditors a chance to get some of the money they are owed. But note there are some debts that won’t be wiped away even by declaring bankruptcy, and having a bankruptcy on your record could affect your credit score going forward.
What happens when a business files for bankruptcy?
When a business files for bankruptcy, it can no longer sell or purchase anything. No money can be taken out of the business, for example dividends or salaries, including salaries to the business owner.
A trustee will come in and oversee the bankruptcy proceedings. They’ll get an overview of the business’ finances, figure out which assets it has and what it owes.
Depending on how much you owe, you might have to sell off personal assets to cover your debts, but note that some items will usually be exempt—such as clothing, household goods and cars.
Are there any alternatives?
There are several things you can try to avoid bankruptcy:
- Get an overview of your financial situation. Set up a balance sheet, if you don’t have one, to get an overview of your finances. This will help you focus on the actual problem areas.
- If you are unable to pay your incoming invoices, you should reach out to your suppliers and try to negotiate a payment plan or an extended due date.
- If you have a lot of outstanding invoices, you should try to get in touch with your clients to figure out why they haven’t paid. You can try to offer a payment plan to get some money quickly
- If you are unable to make your loan payments, you can reach out to the bank to find out if there are any options, such as a payment freeze, or reducing the amount you pay per month
The sooner you get an overview and figure out where the problems lie, the better your chances of avoiding bankruptcy.
