Financial insolvency is a fundamental feature of Chapter 7 business bankruptcy. It happens when a business is unable to pay off its debts as they come due. A business can become insolvent for a host of reasons even through no fault of its own. Unfavorable market or regulatory influences that negatively impact the long-term survival of a business is a common external factors that may cause a business to file for bankruptcy. Toronjo & Prosser Law provides comprehensive legal and debt relief services for business owners in the Dallas-Fort Worth area who struggle to manage their debts due to poor market conditions.
How Difficult Market Conditions Can Lead to Business Insolvency
The economic cycle impacts large and small businesses alike. A recession occurs when there is a prolonged contraction of economic activity measured by declines in the gross domestic product (GDP). During periods of recession, consumer confidence and spending tend to drop and businesses large and small typically face declines in sales and profits. Businesses may try to cut costs by laying off employees and reducing capital spending, but even major cost-cutting measures like these may not be enough to avoid insolvency. Lenders are less willing to give loans. This domino effect tends to result in a spike in business bankruptcy filings.
When an entire industry is in distress, businesses in that particular industry tend to have difficulty staying afloat. Small businesses are especially vulnerable due to lack of a financial cushion, market power, or leverage within the industry to withstand economic downturns. Retailers and restaurants, for example, are generally always at risk for liquidity problems due to seasonal fluctuations and changes in the market that affect all industries equally. Businesses in niche markets are also greatly impacted when there is a lull in economic activity.
Cash flow problems and struggling sales resulting from unfavorable conditions in a particular market often lead businesses toward bankruptcy. This can happen due to external factors in the overall economy or within the industry, over which the business may have no control, such as:
- Increased competition
- Higher borrowing costs and interest rates
- Decreased demand for goods and services
- Inflation, or higher overall costs of doing business
- Tax and regulatory burdens
- Global crises
What is Chapter 7 Business Bankruptcy?
The federal bankruptcy code provides a centralized body of laws that allows financially distressed businesses to deal with creditors, claims, and assets in an orderly fashion. Although there are certain state laws that provide alternatives to bankruptcy, Chapter 7 of the Bankruptcy Code is the primary tool for businesses seeking a court-supervised liquidation of assets and distribution of the proceeds from liquidation to pay off debts. Debtors may also need the unique protections of the Bankruptcy Code, such as the automatic stay of collection efforts or litigation against the business.
The filing of a Chapter 7 bankruptcy petition creates an “estate” that is comprised of virtually all property of the debtor as of the date of the petition. An independent trustee is appointed to locate and liquidate these asserts and disburse the proceeds to creditors based on priority. Unlike an individual who files for bankruptcy relief seeking a fresh start, a business is usually not entitled to a discharge of debts unless you are a sole proprietor.
Commercial Chapter 7 cases are generally straight liquidations, meaning that the business’s operations will cease and the trustee will take possession of the premises and assets and proceed to liquidation. There may not be enough cash available to pay off all the debts following the liquidation, but if any funds remain after the debts are paid, the business owner may keep the remaining money or distribute to shareholders. Chapter 7 bankruptcy is available to the following types of business entities:
- Corporations
- Limited liability companies
- Partnerships
- Sole proprietorships
Business entities that decide to liquidate under Chapter 7 rather than reorganize under Chapter 11 or unwind under state law tend to have more serious solvency or liquidity issues. Choosing to liquidate through Chapter 7 allows a business owner to pay a filing fee, prepare and file a petition and various financial documents with the Bankruptcy Court, and then effectively walk away and turn the business over to a trustee to liquidate and unwind the business affairs.
Choose the Dallas-Fort Worth Bankruptcy Attorneys at Toronjo & Prosser Law
For many business owners, Chapter 7 bankruptcy may provide the most efficient way to liquidate and close their business. If your business is facing financial difficulties and is behind on its debts and bills because of unfavorable market conditions, you will need an experienced bankruptcy lawyer to guide you through this process. Contact Toronjo & Prosser Law today. Our attorneys are well-versed in Chapter 7 business bankruptcy and can help you decide if this is the best option for you.