The term “going bankrupt” means your company or individual can no longer afford to pay off their debts. This includes business debts, financial obligations, and even certain costs such as rent; any unpaid debt can lead to bankruptcy. What happens afterward is anyone’s guess, but it’s usually an awful lot of paperwork that may take months or even years to be completed. Going bankrupt is not fun, but it does happen more often than you might think. The next time you hear someone describe someone else as going bankrupt, know that these situations are quite common. It involves legal proceedings and even affects the United States Federal Government.
The bankruptcy process starts when a business can no longer pay its debts; the first thing that happens is that the creditors who are owed money will be notified. Creditors owed money are usually one-time transactions, like paying off credit cards or bank accounts. Their number will quickly grow if a company is going under and they start calling in their debts.
The creditors will take an account statement and send it to each other until they get all their boxes filled with information.
The company will be placed in bad faith, meaning it is no longer considered viable and will become liquidated. This means they can no longer trade with the public, which means their assets need to be put up for sale. If the creditor thinks it is worth more than their debt, they could take ownership of the company.
The United States declared bankruptcy and became the first industrialized country to do so. The process of declaring bankruptcy is complex, and there are fourteen different ways a company can declare Chapter 11 or Chapter 7. The company can be liquidated, which means it is completely shut down, its assets are sold off, or it can be restructured with a plan that will allow it to still operate.
What Happens During Bankruptcy?
Liquidation is when everything is sold off because the company cannot afford to pay its debts. A Chapter 7 bankruptcy is when the creditors must agree on how to repay the amount owing or receive nothing. Chapter 11 is an easier process than Chapter 7 but can also be more expensive. An additional chapter of the bankruptcy laws allows companies to make new loans while remaining under Chapter 11. It is called debtor-in-possession financing, or DIP. This is not a final solution and will still need to be approved by the court.
What Do Creditors Expect During Bankruptcy?
Creditors must be paid back what they are owed or receive nothing, but they can ask for additional payment if they feel like their business was wronged during the bankruptcy proceedings. The creditors should get priority over their claims against the company to reduce their costs of further litigation.
How Do Companies Get Bankrupt?
There is no single answer, but it usually involves the company developing a serious problem that cannot be fixed. The usual culprits are financial problems and overspending. Financial problems are usually due to the company being unable to pay its creditors and having sold off valuable assets pledged as collateral on the loans. When a company’s debts become too much to cover, or when it begins offering less money than it needs to fund its demands, they end up in a Chapter 11 bankruptcy petition.
Behavior That Will Rock Your Bankruptcy Boat
Overspending is one of the biggest factors in going bankrupt. A company can quickly have a cash flow problem that may cause its creditors to call in their debts. A company can face serious problems when an employee cannot fulfill his duties for any reason, such as a sick child or experiencing an extended unemployment period. This could place the company in a position where it cannot pay its bills. When this happens, the employee’s line of credit is usually no longer available, and the bank will take action to ensure payment is made on time. Many times, employees have sold off assets and equipment when they are behind on payments and make up the difference later with late fees and poor credit ratings.
The United States military is not immune to bankruptcy, but they have a unique clause that protects them from going bankrupt. The United States authorized $15 billion in loans to help provide the armed forces with alternative means of acquiring funds. This gives the military a huge advantage over other government agencies regarding paying their bills. They can still go bankrupt but is less likely than any other government agency to do so.
How Can You Avoid Going Bankrupt?
It’s easy to say don’t overspend, but purchasing more than you need can be tempting. It takes discipline and experience to stick with your plan and not get carried away with the excitement of buying something new or expensive.
If you have good credit and a steady income, consider getting a line of credit. This comes in handy when a monthly paycheck does not cover unexpected expenses. Many companies offer to get an additional loan based on their account balance, but this will affect your credit score. If you have existing loans and can’t get more, try getting lines of credit from friends or family instead. They may only offer cash advances against your account, but that could still help you cover expenses that are too much to cover out of pocket.
Your finances should be built from the ground up to cover any expenses you will encounter while running your business. Having a good plan is the key, so ensure you have considered all aspects of running your business before starting. You don’t want that phone call from your creditors to come as a surprise.