Bankruptcy Doesn’t Have To Be Frightening: The Things You Need To Know

Bankruptcy Doesn’t Have To Be Frightening: The Things You Need To Know

As dreadful as it sounds, bankruptcy is a fate that most small businesses face. From cash shortages to decreasing employee morale, these are just a few of the challenges an entrepreneur must overcome. For us to know the signs that lead to an eventual bankruptcy filing, we need to know more about what bankruptcy and its types are.

Chapter 7

Business Bankruptcy is the most sensible choice for a business that doesn’t have a very hopeful future. A more common term for this is Liquidation. Overwhelming debts sometimes make restructuring less feasible. Chapter 7 is also appropriate when a business does not own any substantial assets.

Chapter 7 Bankruptcy usually means the end of an enterprise. When this happens, a trustee is appointed by the bankruptcy court to take assets of the firm and redistribute it among the valid creditors. If payment to a creditor is successful, the business owner receives a discharge.

“Discharges” release the business owner of any obligations from the debts. Partnerships and corporations are exempt from having a discharge.



Chapter 11

When companies opt for Chapter 11 or Business Reorganization, it usually means that a company can recover from bankruptcy. Companies become reorganized under a court-appointed trustee. If the court permits it, the actual owner of the firm can be the trustee.

Companies who opt for this choice files for reorganization detailing the plans for dealing with its creditors. The creditors then vote on whether the plan is acceptable. The court is the one who ultimately decides if the plan is fair for both parties.

Although Chapter 11 bankruptcies sound tremendously positive, but these are extremely complicated and have a high chance of not succeeding at all.

Chapter 13

Personal Bankruptcy or Chapter 13 bankruptcy is typically reserved for the consumer, but can also be a term for sole ownerships. The process begins with a repayment plan with the bankruptcy court. Compensation plans are how owners plan to pay their debts. The amount that is often needed depends entirely on the owner’s debt or how much property belongs to the proprietor.

Having knowledge of the Bankruptcy types, one can be much better in spotting the early signs of a looming bankruptcy:

Accountability and Responsibility

Roles and responsibilities become blurred once a company is on a looming bankruptcy. Processes involving the overseeing of performances by individual employees, executive staff, and managers are important.


Management Difficulties

Managers become absent in the day to day operations of the firm. Daily tasks become arduous, and the functions of the company suffer

Non-Existent Accounting

Accurate and timely financial data is similar to that of an early warning system. If this becomes absent or becomes lacking, it is virtually impossible to know the direction a business is going. As a tactic, companies sometimes bring the entire accounting department into programs such as “Quickbooks.”

Reliance on such programs makes managers complacent and don’t spend the necessary time in personally getting to know the real state of the accounting information.

Cash Shortages

The occasional cash shortages are shared experiences by businesses, especially during seasonal surges. Be warned, though, that cash flow problems are signs that an owner has not prepared efficiently. It could also be due to another underlying problem.

While cash flow problems usually aren’t a sign of an impending bankruptcy, signs like these often don’t lead to a growing business; especially when it becomes a regular occurrence or becomes a serious one.

Relying on a single source

If income generated from a single client, customer, or product line becomes too big a proportion of the company’s total revenue, it is a bad sign of things to come. When something negative happens to that single source, the corporation’s life is essentially over. If this ever happens, doing something as early as possible can always help. Always look for other sources of income. It does not hurt to diversify.

Deterioration of Services

Frequent customer complaints are a sign that something is wrong with the functions of the business. Managers should act quickly and address the situation to prevent more problems such as customer dissatisfaction.

Lender Unrest

When creditors tend to be nervous, this could be a sign that stakeholders within the company are starting to see negative trends with the economy. Financial ratios, management capabilities, and other aspects of the business can slow down as a result of this.

A slow return of income for lenders is never a good situation. Managers and the owners of companies that are facing these should talk to lenders to alleviate some problems early on.

Declining Financial ratio

Commercial Rates that target figures such as capital, inventory, gross margins, operating income, and other significant numbers are critical in monitoring the health of the company. If the system shows signs of decreasing value, then it may be a sign of problems to come.



Decreasing Employee Morale

Employees are what make the company run like clockwork. If fights start to break out or absenteeism is becoming common, particular problems must become identifiable. If managers do not do anything about it, then problems could become worse.

Hiring Freeze

When a company becomes stagnant, it is a sign that it is not doing well. Expansions should be the norm in a business that is actively moving forward. When times are tough, the Human Resources Department usually initializes a hiring freeze in a bid to save money.

Most of the time, people who apply for a company usually do not get warnings. Positions that people see as an opening remain vacant or open despite the shortage. Cost cutting of workforce also becomes evident. Certain individuals with tasks become overloaded and eventually quit.

Sudden resignation then follows, leaving a company paralyzed completely. If others still don’t leave, morale finally gets weak and eventually lead to more resignations.

Frequency of Closed Door Meetings

Employees often fear closed door meetings for reasons that they don’t know what’s really happening. This situation would lead to suspicion and again, to low morale. Even if it is for positive things that intend to help the company, employees can still feel an imminent change whether good or bad.

Talented Employees leave

Companies will often have a lot of good employees. Excellent employees, however, are hard to find. These employees are those who stay up late and try to exceed quota. Even if reaching the quota isn’t the top priority, the quality of work often becomes the target. Exceptional workers will do anything to provide quality results for a company they believe in.

However, these types of employees can only handle so much. If they start feeling abused or begin to receive little or no compensation for work, morale eventually drops. Production of the company is in motion for depreciation. In worse case scenarios, these workers eventually resign. In even dire situations, if management decides to call it quits, then a looming bankruptcy would eventually lead to other excellent employees to leave.

Benefits disappear

A looming bankruptcy is the greatest downfall to a transactional type of company. Expect catastrophic changes to happen. When bonuses become null and void, employees start to lose interest in their work. Even if they do continue to work, the quality of the work done fails to meet expectations.

These semi-finished products often become more damaging to the company, leading to more disasters. If a lot of employees feel threatened by this, certain legal actions may take place, adding more headache to the higher ups of the organization. If no remedy is present, companies eventually close down and file for bankruptcy.

No one is busy

Stagnation occurs because there isn’t any work to be done. Days when being frantic about a deadline doesn’t happen anymore is also a sign that a company is on the verge of closing down.

If a singular person is experiencing this, then it may be negligible. But if several people are starting to feel a sense of non-urgency, then it’s maybe a good idea to talk to the management about it.

Playing safe

A company continually takes risks. Starting one is even considered a risk. Wise employees will know that when a corporation is frowning on taking risks, then it could be safe to say that something is wrong.

Great ideas that were once considered a good gamble now turn into costly and excessive skirmishes, expansion disappears. Innovation is ignored and pushed down the drain. Instead of making choices that catapult a company forward, management will hold back to prevent any losses from occurring.


Starting a business is every entrepreneur’s dream. Risks have to be taken, and the threat of an impending bankruptcy is always a reality. When one does start a thriving venture, one has to know about the certain types of bankruptcy that could occur.

Knowing the types of bankruptcy can ensure a turnaround of things to come, should a bankruptcy ever happen. Here is a brief look at those bankruptcy types; Chapter 7 Bankruptcy or Liquidation of assets is often the best choice for a company that is inevitably failing. Business Reorganization is a type wherein plans are made to discuss the method of paying a creditor. Finally, Personal Bankruptcy is mainly in use for consumers but can also be a term for describing individual enterprises.

A lot of factors often always show up when a company is nearing bankruptcy. Low morale, relying on a single source, management problems, cash flow inadequacies, shortages, and hiring freezes are just a few of these telltale signs.

In the end, knowing which strategy to play can mean the difference between the rebirth and the total death of a company.

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