What Can Happen if a Struggling Business Doesn’t File for Bankruptcy?
We talk a lot on our blog about the benefits of filing for bankruptcy and the importance of making informed decisions before it’s too late. While filing for bankruptcy isn’t the right approach in all cases, when it is the right approach, acting promptly can be critical for protecting businesses’ interests and maximizing the opportunities they have available. Keep reading to learn about what can happen when a struggling business doesn’t file for bankruptcy from an experienced Miami bankruptcy lawyer at Edelboim Lieberman:
Understanding What Can Happen When a Business Doesn’t File for Bankruptcy
If a business’s owners choose not to file for bankruptcy and the business falls behind on its debt obligations as a result, this can potentially trigger a series of undesirable events. In a typical scenario, falling behind on a business’s debt obligations can lead to:
1. Default
When a business falls behind on one of its debt obligations, the creditor can declare a default in accordance with the terms of the parties’ contract (i.e., a loan, lease, or supplier agreement). This can give the creditor a variety of rights depending on the circumstances involved. In some cases, defaults can trigger immediate liability for the full amount due. In others, they can justify both termination of the contract and immediate efforts to collect the outstanding balance.
If multiple creditors declare a business in default, its financial circumstances can quickly go from bad to worse. Not only can the business face substantial liability tied to its contractual obligations, but it can also find itself forced to defend against creditors’ claims in litigation. Failure to defend against creditors’ claims in litigation can result in the court awarding a default judgment, which can provide creditors with additional tools to pursue collection.
2. Collection Action
Even without a default judgment, creditors can often pursue collection through a variety of means. For secured debts, this generally includes seizing the property securing the debt and then selling it in order to satisfy the amount due (i.e., a foreclosure). If selling the property does not satisfy the full amount due, the creditor can pursue other means of collection as well.
Along with pursuing foreclosures and other similar collection actions, creditors can generally pursue liens, attachments, charging orders, and a variety of other options to enforce their right to payment. All of these can severely complicate a business’s financial circumstances while also leading to additional enforcement-related expenses.
3. Credit Consequences
When creditors initiate collection actions, this can also have severe consequences for a business’ credit standing. If a business is unable to secure additional financing, this can also contribute to a continuing downward financial spiral. The worse a business’s credit rating becomes, the harder it will be for the business to both secure much-needed financing in the short-term and restore its credit rating in the future.
4. Enforcement of Personal Guarantees
In many cases, small business owners will provide personal guarantees for their businesses’ debts. If a business owner has personally guaranteed the business’s debts, this means that the business’s creditors can pursue collection from the owner as well. This is true even if the business is a limited liability entity (i.e., a corporation or LLC). A personal guarantee is a separate, stand-alone contract that establishes direct personal liability in the event of default.
The risk of facing liability under a personal guarantee is often—and understandably—a key consideration for business owners whose businesses are at risk of defaulting on loans, leases, and other contracts. Facing liability under a personal guarantee can have serious financial consequences, and, depending on the circumstances, it can potentially put business owners’ homes and other assets in jeopardy.
5. Greater Financial Distress
Ultimately, failing to proactively address a business’s financial instability can lead to even greater financial distress. Eventually, liquidating the business’s assets under Chapter 7 may be the only viable solution. At this stage, pursuing a business bankruptcy will generally offer fewer benefits than filing earlier in the process—but the costs involved will still generally be the same.
When is the Right Time to Talk to a Miami Bankruptcy Lawyer?
With all of this in mind, when is the right time to talk to a Miami bankruptcy lawyer? We recommend seeking advice as soon as you have concerns about your company’s financial health. Even if it isn’t the right time to file for bankruptcy, an experienced bankruptcy lawyer will be able to help you make informed decisions. An experienced bankruptcy lawyer may also be able to help you pursue various pre-bankruptcy alternatives that can avoid default, collection, and the need for litigation.
With that said, if it is time to consider bankruptcy, acting promptly will help ensure that your business is able to achieve maximum benefits through the process. This is true whether you are ready to wind up your business’s affairs or you want to pursue a Chapter 11 reorganization that keeps your business running. While it is possible to file for bankruptcy on an emergency basis when necessary, businesses that take a proactive approach can work with their legal counsel to make strategic pre-filing decisions—and potentially still pursue pre-filing alternatives that protect key relationships while also minimizing the time and costs involved.
In all cases, informed decision-making is key. While dealing with financial stress can be challenging, taking a proactive approach can help facilitate a resolution that is both as favorable as possible and as efficient as possible under the circumstances at hand. If you have questions about your business’ options for overcoming financial distress, we encourage you to contact us promptly for more information.
Schedule a Call with a Miami Bankruptcy Lawyer at Edelboim Lieberman Today
If you own a financially distressed business in South Florida and need to know more about the options for addressing your business’ financial circumstances, we strongly encourage you to get in touch. To schedule a call with a Miami bankruptcy lawyer at Edelboim Lieberman, give us a call at 305-768-9909 or request a free initial consultation online today.
