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7 Signs your Business is about to Face Bankruptcy

All businesses, both large and small, are bound to experience financial difficulties at some point. This is a common occurrence for any company, given that sometimes it’s impossible to predict which market trends or external factors will affect your company’s operations and, as a consequence, its finances. However, in more severe cases, your company may not be financially prepared to deal with the situation and may be forced to file for bankruptcy. If you pay attention, you may see the signs that your business is about to file for bankruptcy well in advance, allowing you to adequately prepare yourself to handle the crisis. If you want to know what these signs are and what to do when you spot them, make sure you read this article in its entirety.

For starters, what is business bankruptcy?

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Although many people believe that bankruptcy marks the “end” of your business’ existence, the reality is that bankruptcy is a legal process through which a business or individual can get rid of most of their unsecured debts, thus having an opportunity to rebuild their finances from scratch.

As far as business bankruptcy is concerned, you should keep in mind that you have three main options. First, you can opt for the reorganization of your debts (and those of your business) through Chapter 13 bankruptcy, if you are the sole owner of your company. On the other hand, if the business does not have a viable future or if it has few assets, you can also opt for Chapter 7 bankruptcy. Finally, Chapter 11 bankruptcy is designed to help businesses reorganize their debts and stay afloat, and many times that may be your best option.

If you want to know which type of bankruptcy is best suited to your specific case, you may want to consult with a bankruptcy attorney In California, you can find many law firms ready to help you, such as KTBankruptcyLawyer.com. This bankruptcy law firm has years of experience helping individuals and businesses get out of debt and get a fresh financial start.

1. You can’t keep up with the competition

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If your business operates in an extremely competitive market, such as retail for example, and a competitor emerges that offers prices you can’t match or offers conveniences that would be impossible for you to implement, your company may be in trouble. You may lose most of your customers to this competitor before you can devise a strategy to get back in the game, in which case bankruptcy is almost inevitable.

2. Decline in demand

Few products are useful forever. If a novel and more efficient alternative to the products and services you offer emerges, your business may eventually become unsustainable as more and more people adopt other products in place of the ones you offer. If your company fails to adjust quickly, there will be no way to avoid bankruptcy. A recent example is Kodak’s bankruptcy filing due to reduced demand for film photography.

3. Loss of a major client

The loss of a significant client can be catastrophic for any company, regardless of its size. For example, if you have a company that offers security services, and 80% of your revenue comes from a large corporation that you provide services to, and that corporation decides to hire another company that offers more competitive prices, it is almost a certainty that your company will have to file for bankruptcy either to be liquidated or to restructure its finances and get a second chance at success.

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4. Loss in revenue

As mentioned above, it is normal for businesses to experience fluctuations in revenue over time. But if over the past few months, or years, your sales have continued to decrease exponentially and your earnings are getting lower and lower, your business may reach the point where it doesn’t have enough cash flow to pay the bills and operate properly. This factor alone could cause your business to eventually file for bankruptcy.

5. Increase of operating expenses

If the operating costs of running your business increase, and your company lacks the cash flow to withstand the impact, bankruptcy may be the only alternative. For example, when oil prices rise, airlines often have to take the loss of tickets that were pre-sold before the increase. For smaller companies, the slightest price increase in the supply chain can completely destabilize their finances.

6. Your company has too much debt

Source:corporatefinanceinstitute.com

Ideally, you should try to run your business debt-free. But in many cases, you will have to take on multiple loans to get your idea off the ground and have a chance to succeed in the highly competitive modern economy. However, if your business fails to generate the required returns to repay the loans, you may have to file for bankruptcy to have a chance to try again in the future.

7. Your business went through a catastrophe

If your business is struck by a catastrophe from which it cannot recover quickly, bankruptcy may be the only viable alternative. Catastrophes can have many faces, such as the loss of an essential person to the company, either a partner or even the owner, a natural disaster such as a flood or an earthquake (in cases where your company doesn’t have insurance against these types of incidents), the theft of equipment critical for the company, or other types of unexpected situations that can impact the company’s bottom line.

A clear example of an unexpected catastrophe is the Covid-19 pandemic. No one was properly prepared for it, and as a result, the finances of many businesses have been severely affected, and for some, the only alternative has been to file for bankruptcy to deal with their debts.

What should you do next?

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If you have noticed any, or several, of these signs in your business, it is quite likely that you should start considering what to do next. A good first step is to contact a Los Angeles business bankruptcy attorney with the knowledge necessary to guide you every step of the way.

An attorney will increase your chances of success, which translates into your business possibly having another chance to be successful further down the road.

Over the years, many companies that have filed for bankruptcy have taken advantage of the process to restructure their finances and get back on the road to success once again. Some notable cases include General Motors in 2008, Texaco in 1984, and even the incredibly successful Marvel Entertainment in 1996.

If you are looking for more useful information about bankruptcy, or want to contact a business bankruptcy lawyer near you, visit Legalfacts.org. Here you will find articles on various types of legal topics, which will help you learn about the law in a matter of minutes.


Ricardo is a freelance writer specialized in politics. He is with foreignpolicyi.org from the beginning and helps it grow. Email: richardorland4[at]gmai.com