Bankruptcy is frequently seen as a last resort for those who cannot meet their debt obligations—and for good reason. While it can sometimes be the only option available, bankruptcy carries significant repercussions that can linger for years. This article presents practical strategies to help avoid bankruptcy whenever possible.

Understanding Bankruptcy

The two types of bankruptcy most commonly utilized by individuals are Chapter 7 and Chapter 13. Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the sale of a debtor’s non-exempt assets to pay off creditors. In contrast, Chapter 13 bankruptcy, known as reorganization bankruptcy, allows individuals to keep their property while using their income to create a plan to repay all or part of their debts over a period of three to five years.

Both Chapter 7 and Chapter 13 bankruptcies will linger on a person’s credit report for an extended period—10 years for Chapter 7 and seven years for Chapter 13—significantly hindering their ability to secure credit in the future. This prolonged period can make it challenging to obtain loans, credit cards, or even favorable interest rates for many years.

Additionally, business bankruptcy serves as a glaring red flag to insurance companies, making it more difficult and expensive to secure insurance coverage. As a result, businesses that have filed for bankruptcy may face higher premiums or even denial of coverage altogether. This can significantly impact the ability of the business to operate and recover from financial hardship. The implications of filing for bankruptcy are far-reaching and can affect various aspects, emphasizing the importance of considering all options and seeking professional advice before proceeding.

How to Avoid Filing for Bankruptcy

Unexpected issues or sudden business disruption can challenge anyone’s finances, but poor spending and saving habits can also lead to bankruptcy. Regardless of why your finances are precarious, here are some steps that may help improve your situation.

Minimize Your Business Spending

To take control of your finances, begin by understanding your monthly expenses and tracking where your money goes. Creating and maintaining a budget might seem tedious, but it is the most effective way to achieve this.

Next, identify areas where you can cut expenses. Start by negotiating with your suppliers for better deals and discounts. Research alternative options, such as switching to a more cost-effective software or finding cheaper office space.

Another way to reduce costs is by implementing energy-saving measures in your workplace. This can include using energy-efficient light bulbs, turning off electronics when not in use, and adjusting the thermostat to save on heating and cooling costs.

Secure your business credit cards in a safe place and try to use cash—whether physical currency, a debit card, or a smartphone-linked cash account—whenever possible. Avoid canceling business credit cards, as this can reduce your credit limit and increase your credit utilization ratio, negatively impacting your credit score.

If living on a cash-only basis proves unsustainable, it’s a sign you need to economize. Both large and small expenses matter, though larger cuts will yield greater savings.

These measures might not be enjoyable, but they are far preferable to the hardship of bankruptcy.

Look to Maximize Business Income

Once you’ve minimized your overhead, you may still not have enough money coming in to pay for your business expenses in cash. If that’s the case, see if you can increase your income. Here are some ways to do it:

Raise Prices: One of the most obvious ways to increase your business income is to raise prices for your products or services. However, this can be a delicate balance as you don’t want to price yourself out of the market or alienate loyal customers. Before raising prices, make sure to research what other businesses in your industry are charging and consider the value you provide to your customers.

Obtain Outside Financing: Your business may not be generating enough income due to lack of resources or funds to invest in necessary equipment, marketing efforts, or employees. In this case, obtaining outside financing can help you secure the necessary funds to improve your operations and ultimately increase your income.

This can come in the form of a loan from a bank, an alternative lender, or a small business grant from the government. Make sure to carefully consider the terms and interest rates before deciding on which option is best for your business. When facing financial challenges, alternative lenders might be your best bet due to their more flexible standards.

Expand Your Product/Service Offering: Another way to increase your business income is by expanding your product or service offering. This can attract new customers and provide more value to your existing ones. Conduct market research to identify potential gaps in the market and see how your business can meet those needs. You can also consider offering complementary products or services to your existing offerings.

Improve Your Marketing Efforts: Having a strong marketing strategy is crucial for increasing business income. By effectively promoting your products or services, you can attract more customers and generate more sales. Consider investing in different marketing channels such as social media, email marketing, or paid advertisements to reach a wider audience and increase brand awareness.

Improve Customer Retention: Acquiring new customers can be costly, so it’s important to focus on retaining your existing ones. Happy and loyal customers not only bring in recurring revenue but also serve as advocates for your business through word-of-mouth marketing. Make sure to provide excellent customer service and continuously improve your products or services to keep your customers coming back.

Consider Consolidating or Settling Debts

Debt consolidation, which involves paying off multiple high-interest debts with a single lower-interest loan, is often touted as a strategy to avoid bankruptcy. If you qualify for such a loan, consolidation can be an effective approach, provided it doesn’t become an excuse to resume overspending.

Debt settlement is another option. This involves negotiating with creditors to reduce your debt, either on your own or through a hired company. The premise is that creditors might accept a partial repayment now rather than risk receiving nothing if you declare bankruptcy. However, this field is rife with fraud, so thoroughly vet any debt relief company you consider hiring.

Explore Credit Counseling

A not-for-profit credit counseling agency can be immensely valuable. These agencies provide guidance on debt management and can negotiate with creditors on your behalf. For instance, a creditor who refuses to settle for less might agree to lower your interest rate, extend your repayment term, or make other adjustments to reduce your financial strain.

Legally, businesses are now required to obtain pre-bankruptcy credit counseling before filing for bankruptcy. This is a requirement under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Most of these services are offered at no or low cost to clients.

The Bottom Line

Owners may consider bankruptcy for various reasons, many of which might not be their fault. Unforeseen circumstances can push businesses towards financial distress. Sometimes, bankruptcy is their only option. However, by devising a practical plan to eliminate debt, such as creating a budget, negotiating with creditors, and seeking professional financial advice, along with maintaining financial discipline, you can potentially avoid bankruptcy and the myriads of issues that come with it, such as a damaged reputation and emotional stress. Taking proactive steps can help build a more secure financial future.