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Accounting Money

Thinking of Filing for Bankruptcy Due to COVID-19? Here’s What to Consider

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The months spent in lockdown earlier this year changed the landscape for businesses. Many struggled to keep afloat with no physical customers, no high street shopping and restrictions over whether you were allowed to keep your business open or not.

Even those with online businesses struggled. Supply chains stalled, halting production lines. How could anyone send out a product if the product couldn’t be made?

As big businesses fell, one after another, all hope seemed to be lost. Bankruptcy hit companies that seemed infallible. The message was clear: COVID-19 can hit any business badly, big or small.

Whilst there seemed hope in the call for shopping at small businesses during the pandemic, it was the small businesses that suffered the most. Predominantly, consumers turned to Amazon for their needs; Jeff Bezos’ net worth passed $200 billion thanks to the pandemic.

Plenty struggled to cope during the pandemic, and plenty turned to bankruptcy when it seemed that they just weren’t going to make it through this obstacle. But bankruptcy is a big decision, with lasting consequences – consequences that can’t be taken back. So if you are thinking about bankruptcy, there are some things to consider first.

What Are the Signs I Should Be Thinking About Bankruptcy?

1. Monetary Losses

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Simply: if your business isn’t making money anymore, there’s probably something wrong. But in the months of lockdown earlier this year, many struggled to make a profit. What you need to consider is whether or not your business has managed to recover from the blow of the pandemic, or is it forecasted to do so?

If, month after month, you are still losing money, and there is no hope that you might start to, bankruptcy might be something to consider.

A lot of profit is needed to make up for the losses sustained during the lockdown. Continuing to leak is a problem. Especially considering the pandemic might lead to more lockdowns, as is happening over European countries right now, it would do well to consider if your business could last another lockdown.

We don’t know how long the pandemic will last. It might be smartest to cut your losses now.

2. Cuts to Dividends

When your company struggles, dividend payments are usually the first things to reduce or go completely. If you have been reducing your dividend payments, you might be in trouble.

Keeping dividend payments smaller or cut completely is not a long term solution. Without them, your capital inflow will reduce, in turn, affecting both supply levels and efficiency available to your business. An inefficient business is destined to fail.

Consider the changes you have made to dividends. If you’ve cut them, when will you be able to raise them again? If the answer is uncertain, maybe bankruptcy is something to consider.

3. Banks

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If banks are refusing to give you loans, you know you are in trouble. Without the finance you need from the banks, your company cannot grow. Without growth, you are stuck in whatever position you find yourself. If that position is a bad one, considering bankruptcy might be smart.

4. Changes in Staff

Laying off staff is a sure sign of a struggling business. But without a workforce, what is left? Furthermore, if high-level management positions are leaving the company, it is clear they are worried about the business. Without the confidence of your management workers, it is likely your business is struggling more than you think.

What Can I Do Instead of Bankruptcy?

1. Reduce Costs

Selling assets can be a quick way to gain cash flow to pump back into the business. It may be smart to sit down with the company accountant and look at all the places you can cut costs. If you can band together enough, you might find loopholes in which your company can manage to pay its debts.

2. Consider Debt Consolidation

Instead of bankruptcy, you can turn to debt consolidation. Debt consolidation allows you to merge your debts into one greater debt, which, with the right loan plan, can be paid back more affordably. Learn more about bankruptcy vs debt consolidation from Leinart Law.

3. Governmental Help

Governments across the globe are offering help to businesses who are struggling due to the pandemic. In the UK, the furlough scheme has been extended through the second lockdown. Schemes like these can reduce labour costs, freeing up money to spend on costs and debts. Look into the help available, and see if these benefits can save your company from bankruptcy.

What Are the Cons of Bankruptcy?

1. Personal Cost

To clear debts, assets from both the company and yourself may be needed to be sold. The implied issue that comes with this is that the loss of equipment (such as your own vehicle or electronic devices) might need to be sacrificed. These are things necessary for business, and so losing them could have long term issues.

2. Impact on Your Credit Report

Filing for bankruptcy is something that stays on your credit report. A bankruptcy filing will appear for six years, which may not seem too long, but knock-on effects of this may be much longer term.

Knock-on effects can be caused by the fact it will be tough to get credit with a poor report. This affects your ability to get loans, but also anything that uses a credit system, whether that be pay-later schemes, electricity or gas.

Unfortunately, pay as you go schemes tend to be more expensive.

3. Exclusion from Professional Bodies

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If your company comes from a professional background – whether that be accountancy or law – there is a chance you may be barred from the professional body to which you belong.

This, of course, will affect any future plans you have for businesses within that sector.

4. Employability

Bankruptcy proves you an unreliable businessperson. This means that it may be more difficult to find an employer willing to take you on. Especially when it comes to money handling, your record will prove you a poor candidate.

Having already sacrificed so much personally by filing for bankruptcy, it can become a real problem if you then struggle to find work afterwards.

What Are the Benefits of Bankruptcy?

1. Employability

Though you may struggle to find people willing to employ you, you can turn to self-employment. If you act as a sole trader, there is still potential for profit. Under guidelines, you must still operate under the name you used when filing for bankruptcy. Your business is shut down, but you still can exist as a trader on your own.

2. Erased Debt

The greatest benefit of declaring bankruptcy is simple. Your debts and financial pressures are extinguished. You do not have to pay for them.

If that feels like a relief to read, it’s probably a sign there is too much to handle with your business right now.

3. Legal Freedom

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Along with the erasing of debt, you are now free from legal pressures. When you can’t pay up on debts, there is the threat of legal challenges by creditors. This only adds to your costs and stress levels, and if given a chance to remove this, it is often worth taking.

4. Decreased Personal Risk

When companies get into dangerous levels of debt, it is often the owners who become personally liable. Through bankruptcy, this risk is taken care of. Sometimes it is important to weigh up whether your business is higher in your priorities than the personal side of your life. If you have children or elderly parents to think of, it is important you don’t endanger yourself personally too much.

No one can tell you when to file for bankruptcy, or if it is even a good choice. You can’t even know whether it is a good move. But the pandemic has hit all businesses at varying levels, and many have found themselves in the position of considering (or filing) bankruptcy.

This time is unlike any other for the business world. It is important to think long term, even though it is difficult to imagine even a year from now. Businesses aren’t short term investments. If you want to build something big, you need to consider whether COVID-19 is something both you and your business will be able to weather.

Because your business isn’t the only thing being hit by COVID-19, you are too. Here, plenty of practical, business points have been offered to consider. But it is also to ask yourself personal questions. Do you have the emotional strength to deal with a challenging time in business? Do you have supporters around you to help when things inevitably get hard? Do you have the financial ability to intervene in your business if obstacles make the company struggle once more? Can you appear as a strong leader in an uncertain time?

Again, a bankruptcy filing is a big decision, with waves of implications. Talk to your workers, talk to your creditors. Talk to people who know the business best.

Do your research. Make your decision.

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