Founder
When financial difficulties threaten your business, it’s crucial to evaluate your options for regaining stability or winding down operations. Two common strategies for addressing mounting debt are selling assets and filing for bankruptcy. Both approaches come with unique benefits and challenges, and choosing the right path depends on your specific financial situation and long-term goals.
In this blog, we’ll break down the key considerations to help you decide whether selling assets or filing for bankruptcy is the better option for your business.
1. Understanding the Two Approaches
Selling Assets
Selling assets involves liquidating some or all of your business property—such as equipment, inventory, or real estate—to pay down debts. This strategy can help reduce liabilities without the need for court involvement, preserving your business’s reputation and giving you more control over the process.
Filing for Bankruptcy
Bankruptcy provides a legal framework for resolving debt through asset liquidation (Chapter 7) or debt reorganization (Chapter 11 or Chapter 13). It may involve court supervision, creditor negotiations, and possible debt discharge, depending on the type of bankruptcy.
2. When to Consider Selling Assets
Selling assets might be the right choice if your business is facing financial challenges but has the potential to recover with a smaller debt load. Here’s when selling assets may be a viable solution:
a. To Reduce Debt Without Closing
If your business is struggling with debt but still has strong revenue potential, selling non-essential assets can free up cash to pay creditors while allowing you to keep operations running. For example:
- Selling unused equipment or excess inventory.
- Downsizing office or warehouse space.
b. To Avoid Bankruptcy
If you’re concerned about the stigma, cost, or credit impact of filing for bankruptcy, selling assets can be a proactive way to resolve debts on your own terms. Creditors may also view this as a good-faith effort, which could help in negotiating better repayment terms.
c. To Prepare for a Business Pivot
Sometimes, selling assets is necessary to transition your business to a new model or focus on more profitable areas. This might include shedding outdated equipment, closing unprofitable locations, or discontinuing underperforming product lines.
d. To Pay Priority Debts
Certain debts, such as taxes or employee wages, have legal priority. Selling assets to satisfy these obligations can protect you from lawsuits or other aggressive collection actions.
3. Challenges of Selling Assets
While selling assets can be an effective way to resolve debts, it’s not without risks:
- Loss of operational capacity: Selling key assets may hinder your ability to generate revenue.
- Depressed market value: In financial distress, you may be forced to sell assets at a significant discount.
- Limited debt resolution: If your debts far exceed the value of your assets, selling them may not be enough to solve your financial problems.
4. When to Consider Filing for Bankruptcy
Filing for bankruptcy may be the better option if your debts are overwhelming and selling assets isn’t enough to resolve them. Here are key situations where bankruptcy should be considered:
a. When Debts Exceed Assets
If the total amount of your debts significantly outweighs the value of your business assets, bankruptcy may provide the legal protections needed to address these obligations. In Chapter 7 bankruptcy, the business’s assets are liquidated, and most debts are discharged, offering a clean slate.
b. When Creditors Are Uncooperative
If creditors refuse to negotiate or pursue aggressive collection efforts—such as lawsuits, liens, or wage garnishments—bankruptcy can provide an automatic stay to halt these actions. This gives you breathing room to restructure or liquidate assets in an orderly way.
c. When You Need to Protect Personal Assets
For sole proprietors or business owners who’ve personally guaranteed business loans, bankruptcy can help shield personal assets from creditors. While Chapter 7 may require liquidating non-exempt assets, exemptions often protect essential property, such as your home or car.
d. When Business Operations Are No Longer Viable
If your business is deeply insolvent and cannot recover, bankruptcy allows for an orderly closure. Chapter 7 lets you wind down operations, pay off creditors as much as possible, and discharge remaining debts.
e. When You Want to Reorganize Debt
For businesses with a path to recovery, Chapter 11 bankruptcy provides a framework to restructure debt and renegotiate with creditors while continuing operations.
5. Pros and Cons of Selling Assets vs. Filing for Bankruptcy
Selling Assets
Pros:
- Maintains control over the process.
- Avoids legal costs and public record of bankruptcy.
- May preserve relationships with creditors.
Cons:
- Limited relief if debts exceed asset value.
- Potential loss of critical business tools or capacity.
- Requires finding buyers, which can take time.
Filing for Bankruptcy
Pros:
- Provides comprehensive debt relief, including discharge of eligible debts.
- Offers legal protections, such as the automatic stay.
- May allow for reorganization and continued operations.
Cons:
- Public record of bankruptcy may impact your reputation.
- Legal and administrative costs can be high.
- Loss of control in court-supervised processes.
6. Combining Strategies: Selling Assets Before Filing for Bankruptcy
In some cases, selling assets can complement a bankruptcy filing. For example:
- Pre-bankruptcy liquidation: Selling assets before filing can help pay down priority debts or retain exempt property.
- Chapter 11 funding: Liquidating non-essential assets can provide funds to support a debt reorganization plan.
It’s important to consult with a bankruptcy attorney before selling assets if you’re considering bankruptcy, as certain sales may be scrutinized or reversed by the court.
7. Making the Right Decision for Your Business
Deciding whether to sell assets, file for bankruptcy, or combine the two requires a clear understanding of your financial situation, business goals, and legal obligations. Here are some steps to take:
- Assess your financials: Evaluate your debts, assets, and cash flow to determine the scope of the problem.
- Consult with professionals: A financial advisor or bankruptcy attorney can provide insights into the best course of action.
- Negotiate with creditors: Explore repayment plans or settlements before committing to bankruptcy.
Let Dennery Law Help You Navigate Your Options
At Dennery Law, we understand how stressful it can be to face financial uncertainty in your business. Whether you’re considering selling assets, filing for bankruptcy, or pursuing a combination of strategies, our experienced attorneys can guide you through the process and help you make the best decision for your unique situation.
Contact Dennery Law today for a free consultation, and take the first step toward resolving your business debt with confidence.