In 2010 there were almost 1.6 million bankruptcies in the US.
Numbers have fallen since then, but thanks to the impact of COVID-19 it’s highly likely that we will see a new peak.
What is bankruptcy exactly? Why would a business want to file for it? Most importantly, what are the long-term implications of filing for bankruptcy?
Read on as we take a look at the lasting effects of business bankruptcies.
What Is Bankruptcy?
Bankruptcy is a legal process that applies to either businesses or individuals when they are unable to afford to pay outstanding debts.
It offers businesses or individuals the chance to have some of their debts forgiven. It also gives creditors the opportunity to get back at least some of their money via liquidation of assets or structured payment plans. With debts written off or reduced, businesses are able to make a fresh start without the shadow of crippling debt hanging over them.
There are different types of bankruptcy that you can file for, depending on your situation. These include Chapter 7, Chapter 11, and Chapter 13.
What Are the Effects of Bankruptcy?
Filing for bankruptcy can make financial sense in certain situations, but you should always be aware that it isn’t a magic wand.
There are long-term effects that come with filing for bankruptcy. Some of these are positive, but there are also lasting negative effects too.
The Positive Effects
There most obvious positive effect of filing for bankruptcy is that you have your outstanding debts are eliminated or suspended. It means that you are no longer liable for any debts incurred prior to filing for bankruptcy. This can be a huge relief for both businesses and individuals as it allows you to make a fresh start without the anchor of spiraling debts.
Another benefit of business bankruptcies is that under a Chapter 11 reorganization, a business can end its current contracts in order to negotiate more favorable terms. Vendors and suppliers are often willing to agree to these renegotiations because it is in their interest for your business to keep operating so that you continue to purchase supplies or services from them.
The Negative Effects
There are serious consequences to filing for business bankruptcy.
By filing for bankruptcy, you earn yourself a track record of being unable to meet your debt obligations. This makes you, or your business, a higher risk for lenders.
Being a higher risk means that the terms of any future credit agreements will be worse than for a business that is lower risk. You are likely to face higher interest rates and may be refused for credit by some lenders. Bankruptcies can stay on credit reports for up to 20 years.
Chapter 7 bankruptcy applies to sole proprietors. In this case, your business will be wound down and any assets sold to pay off creditors, so your business will no longer exist. In addition, a Chapter 7 bankruptcy can affect your personal credit score.
Chapter 13 allows you to create a repayment plan to pay off outstanding debts. If you are able to do so, the impact on your business credit will not be quite so harsh.
As you can see, filing for bankruptcy is a complex business. The good news is that there is business bankruptcy help available.
Understanding Business Bankruptcies
An understanding of business bankruptcies means that you know what your options are if things are getting tough. Although bankruptcy can be complex, there is help out there if you need it. If you’re struggling, contact a good legal firm who will be able to talk you through the best options.
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