When to file bankruptcy

Bankruptcy sometimes has negative undertones, but in fact, bankruptcy is relatively common. Some of the world’s best business people and famous performers have filed bankruptcy, including Mike Tyson, Larry King and Henry Ford. Walt Disney’s first film company went bankrupt in 1923, but he didn’t let that stop him – he created Mickey Mouse just five years later. 

Whether you are famous or not, everyone in serious financial trouble asks themselves the same questions: Should I file bankruptcy? How many times can you file bankruptcy? Why do people file for bankruptcy? Whatever answers apply to your situation, understanding when to file bankruptcy and the reasons to file bankruptcy means knowing all your options for getting through hard times. 

Bankruptcy protection is supposed to do just that: protect you. It’s meant to give you a clean slate. Don’t get caught up in a cycle of shame or regret – learn from your experiences, change your mindset and create a business plan that will take you all the way to the top.

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Should I file bankruptcy

Although there is still lingering stigma around financial insolvency, attitudes toward when to file bankruptcy are evolving. More and more, asking “Should I file bankruptcy?” is seen as a common-sense way to explore your options for discharging debt. Now, filing for bankruptcy is recognized not only for relieving personal debt but also for protecting entrepreneurship from the inevitable risks of doing business.

When to file bankruptcy

Why do people file for bankruptcy? There are many reasons, all of which hinge on context. The most basic definition of bankruptcy is the inability to pay off one’s debts. Investopedia reports that the top five reasons to file bankruptcy include loss of income (from unemployment or divorce) and increase in (medical) expenses. The answer to “should I file bankruptcy?” will almost always be “it depends.” We hope the answer is always “no,” but here are a few signs that filing bankruptcy might be right for you.

1. Your personal assets are at risk

Filing bankruptcy can protect personal assets, such as your home, from creditors. Businesses that operate as sole proprietorships or partnerships frequently intermix personal and business assets, and courts will often rule that the business is not a separate entity. This can put your personal assets at risk when collections agencies or creditors come calling. 


2. You need protection from creditors


In larger companies, like corporations or LLCs, personal assets are legally separate from business assets. However, creditors can still attempt to liquidate your business in order to get the money they’re owed. If you simply dissolve a partnership, fold the business and close up shop, you won’t get relief from the debts you owe. If you’re asking “Should I file bankruptcy?,” you likely already understand that bankruptcy proceedings – depending on the type you choose – eventually provide debt relief. Your debts either will be discharged once all your assets are sold off and creditors are paid, or you will create a plan in which you pay them back on a set schedule, which the creditor has agreed to.

3. You don’t have the time or energy to continue running the business

Life can change quickly, and you may find yourself in a situation that leaves you little time for your business, especially one that needs to work its way out of debt. If you don’t have an exit strategy and you’re unable to sell the business due to your debts, bankruptcy can be a quick solution – just be sure you’ve tried all your other options first. 


Additional reasons to file bankruptcy

As a business owner, you should have a plan in place for every scenario you can think of – even unpleasant ones like when to file bankruptcy. If you find yourself with zero revenue and are completely unable to pay back any debts, you have clear-cut reasons to file bankruptcy. But don’t let your fears or limiting beliefs influence your choices. Understand all your options, and realize that filing for debt relief can be a strategic move. Here are three considerations to take care of first.

4. You have a plan in place

Although part of understanding when to file bankruptcy involves creating a plan, it’s always helpful to have an idea of what it will entail for your business. Always consult an experienced bankruptcy lawyer. For public companies, it can be helpful to create a reorganization plan and get it approved by your creditors and stockholders before you file for bankruptcy. This will make the process faster and easier.


5. You’re not selling off any assets


Before asking “should I file bankruptcy?,” consider your alternatives. One strategy many businesses pursue is to sell off parts of the company that are not profitable, but that have the interest of investors. However, if you then end up liquidating your company, this can backfire. The court will typically look back one or two years, and assets sold during this time may be classified as “pre-bankruptcy planning.” The court may find that they should be part of the proceedings – and take them back.

6. You’ve tried all your other options

Why do people file for bankruptcy? They’ve tried all their other options, including negotiating with creditors. The good news is that creditors want to be paid back – and bankruptcy proceedings often aren’t good for them, either. You can also file for a “general assignment of benefit for creditors,” which works much like a Chapter 7 liquidation, but occurs at the state level. This avoids a federal bankruptcy judgment.


How many times can you file bankruptcy?

There are limitations based on the amount of time that’s passed since the date you won your bankruptcy case (as opposed to the date you filed for bankruptcy). If you file too soon after winning a previous bankruptcy case, you won’t be eligible for another discharge. Answering the question of how many times can you file bankruptcy also depends on the type of discharge you won and the type you are planning on filing next. The law distinguishes between Chapter 7 and Chapter 13 bankruptcy cases, and you’ll need to wait between two and eight years for either type. If you’re seeking answers to when to file bankruptcy, consult an experienced bankruptcy attorney to cover all your bases.

Whether your business bankruptcy is caused by scaling issues, cultural problems or just plain bad luck, you need to be prepared for it. If you’re considering filing bankruptcy, you must create an action plan so you can thrive. Once you determine when to file bankruptcy, then you can start thinking about how to bounce back from it. Try to channel a productive mindset and cultivate positive emotions, and never believe that you are a failure. Get the support you need to overcome obstacles with this special trial offer on Tony Robbins’ Ultimate Edge.

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