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What Makes a Business File For Bankruptcy?

There are many reasons why a business might file for bankruptcy relief. Whether triggered by an economic downturn, unexpected expenses or reduced income, defending costly and risk-filled litigation, or even a worldwide pandemic, thousands of businesses file for bankruptcy every year. Our Los Angeles debt relief team outlines the main reasons why businesses file for bankruptcy and seek creditor relief and protection below.

Business Decisions That Don’t Work Out

Business decisions sometimes just don’t work out as planned. Sometimes these decisions are hasty and due to a lack of planning and level-headed thinking. Sometimes they are carefully thought out and seem to make all the sense in the world, but just don’t pan out as expected. A reversal in one’s business plan results in reduced profits or losses, causing management to figure out how to make dwindling cash resources last and ultimately who not to pay. Often once this cycle starts it is hard to pull out of as inventories drop and debts accumulate. While no company is immune to mistakes, such reversals can increase the likelihood of a business filing bankruptcy.

Market Conditions

Overall poor economic conditions and difficulty in specific markets will always make business operations difficult. When the economy enters a recession, consumers tend to lose confidence in their spending, causing businesses to lose out on their revenue.
One of the most common examples of this is music and video stores. With our world becoming increasingly digital, fewer people are likely to walk into one of these stores to buy a record or movie in favor of a digital download or streaming service. This competition from much larger companies and corporations has caused many small businesses to crack under the pressure and file for bankruptcy.

Financing Issues

One of the biggest challenges that small businesses face in particular is financing. Many small business owners rely on taking out loans to help finance their operations when they first begin. If they struggle to repay lenders or their business experiences roadblocks, lenders may be less willing to grant additional credit and may exert pressure to collect, worsening the situation. Even if a business owner is able to keep their company running without further financing, it may only be short-term. As profit dwindles and debt service increases, bankruptcy can assist the business by restructuring the balance sheet by eliminating debt.

Litigation Defense

One of the primary culprits leading companies to need to seek bankruptcy relief is the defense against lawsuits. Litigation presents unique challenges including:

  • Management must divert their attention and resources away from more productive and profit-generating tasks
  • Paying for defense costs is always unplanned and often an enormous expense
  • There is always a risk of loss and the entry of a judgment can be financially catastrophic for the business

Each of these can increase the likelihood or the need for bankruptcy protection. Anytime you are facing litigation that could potentially threaten your business, it is always advisable to seek counsel early in the litigation process with a qualified bankruptcy attorney.

Cost Control

Even when a company is able to generate large amounts of revenue, profits can suffer if the cost of production is too high. These costs include:

  • Employee wages
  • Cost of materials and parts
  • Rent/lease on properties and facilities
  • Paying interest on business debts

Overspending, whether intentional or unintentional, limits a company’s ability to maximize its profit and stay afloat.

Contact Our California Bankruptcy Team Today

We understand the difficulties of running a business in today’s world. When nothing seems to work and debts seem to keep piling on it is easy to feel helpless, but you do not have to go at it alone. Our skilled debt relief team has the experience you need to help you find financial freedom.

If you would like to find out more about how we can help your business get rid of debt, get in touch with us today through our website or give us a call at (310) 220-4147 to schedule a consultation.