Business Going Under? How to Identify Whether or Not It's Time for Bankruptcy

Hannah Whittenly

August 08, 2017

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Any struggling business should keep careful track of its debt. About 96 percent of new businesses fail within 10 years. When you should file may be as important as determining whether to file. Bankruptcy can eliminate your debt, but you aren't gaining anything. You need to file when you're confident that you'll have the capital to survive post-bankruptcy. Here are factors in deciding whether it's time to file.

Miss Payments

Consistently falling behind on the bills, even if you can negotiate and make it up later, is not a good sign. Your business has cash flow problems. It only takes a couple of bad months before creditors are threatening to repossess your fleet or vendors stop granting you credit. Anticipate and budget your bills. If you know you'll have trouble keeping up with them, bankruptcy will stop creditor harassment while you reorganize your finances.

Limit Your Debt

If you're barely managing to pay the bills and stay afloat, you might want to look at them historically and see whether your obligations have multiplied and increased over time. When that's the case, you may be able to make a rough projection of when debts mount up beyond your control. Determine what your limits are. Reaching that point is a sign you may need to give in and file bankruptcy.

Fail to Make Payroll

When you have trouble making payroll, the first solution that comes to mind is usually to start laying off employees. Should you take that route, ask yourself if you can still meet production expectations and deadlines. If not, you're only putting off the inevitable. Reducing debt at the same time may give you the chance to restructure. Bankruptcy may be the key to managing this.

Calculate Liquidity

You should be tracking your assets vs liabilities on a regular basis. Determine your liquidity ratio by dividing total assets by total liabilities. Low liquidity is a sign that your business is in trouble. If the ratio is less than one, you may not be able to meet your obligations and still survive as a company. A Chapter 7 bankruptcy takes four to six months. When a free-falling liquidity ratio suggests you won't be doing business much longer, a bankruptcy attorney will be your best option.

Chapter 11 bankruptcy allows you to restructure your debt. If you're ready to walk away, Chapter 7 will help protect you from personal liability. An attorney can explain your best options.