How to Keep Your Business from Going Bankrupt

Lizzie Weakley

August 20, 2014

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Bankruptcy is a federal court process that requires businesses and individuals to repay their debts under the protection of bankruptcy court or wipe off the debts altogether. When a business files for bankruptcy, a court stay is implemented that prevents creditors from collecting any debt without getting the approval of the court.

How to Avoid Filing for Bankruptcy
A business can avoid bankruptcy by opting for an out-of-court workout or an assignment for benefit of credits. An out-of-court workout allows the business entity to continue to operate without court supervision. Assignment for benefit of creditors, on the other hand, is a vehicle for liquidating business outside of federal bankruptcy court.

Out-of-Court Workout
In this option, the debtor strives to solve the financial problem by arriving at an agreement with creditors outside the court. This option is recommended over filing of bankruptcy. However, as it requires the consent of creditors, it may not always be effective.

Before opting for an out-of-court workout, the management must find out if there is any way of turning the business around. If this option is pursued by a business, the creditors can be repaid in future through several options including future cash flow, equity infusion and new financing.

In order to offer repayment option to creditors from future cash flows, the business must be capable of sustaining its operations from those activities while also generating sufficient positive cash flow to repay the debt.

On the other hand, if options, such as equity infusion or new financing are sought, it may be very challenging for the business to find an investor willing to invest their money only with the purpose of making a payment to creditors. While some agencies seek to offer these options to businesses, they may charge a very high commission for these services.

Assignment for Benefit of Creditors
This refers to liquidation of business under the state law, which is an alternative to filing for bankruptcy liquidation under the federal bankruptcy law. The assignment is overseen by the state courts as opposed to the federal bankruptcy courts. Under this option, rehabilitation or reorganization of business is usually not possible. An independent assignee is entrusted the task of liquidating the business assets at maximum value. After paying the creditors, any residual funds are returned to the business shareholders.

Under an assignment, the business hands over its assets to an assignment estate, which is represented by the assignee. Generally, the assignee is selected by the business, though creditors can also influence the selection process.

What if a Business Has No Option But to File for Bankruptcy?
There are instances where any kind of settlement does not seem to work for a business. In that case, the only option left is to file for bankruptcy. A recommended option is to look for a professional consulting firm like Exelby & Partners Ltd. who specialize in bankruptcy. There is a lot of paperwork involved in the process, and the consulting firm can take care of the entire process for the business.

Bankruptcy is a desperate measure that should only be opted as a last resort. Sound money management is crucial for businesses to avoid going bankrupt. By planning ahead and staying on top of its liabilities, a business can turn the tables before it's too late.