This is perhaps the hardest question you will ever confront as an entrepreneur. The thought of how much you’ve invested in the business and the future uncertainties can be draining, to say the least. However, when you are faced with overwhelming debt, you may have no option left other than to declare bankruptcy for your business.

In some cases, you may want to hold off based on the feeling that things will get better soon. But this may not be a good idea at all times.

Bankruptcy filing documents

In this article, we will tell you some instances when filing for bankruptcy is the best choice for your small business.

Your cash flow challenges are long term

While cash flow crises are tale-tell signs that you may have to file for bankruptcy, you should note that bankruptcies rarely happen due to a single or a couple of late payments. If you have a bad week, month, quarter, or year, but still have the end in sight, you can work to get the cash flow of your business back on track. This may involve some hard decisions like cutting personnel, expenses, and sometimes, your pay.

You may also need to adjust your management and enhance your marketing to improve your income streams. But if you cannot foresee a realistic solution to your cash flow problems and are behind on payments by more than a half a year, you may want to find a quick solution for your financial issues.

Your personal assets are at risk

As a small business owner, you should only consider bankruptcy when your personal assets are at risk. So, if it’s only your limited liability business that’s facing a financial problem, you may just close the doors and move on. But if not, you may have a greater need to file for bankruptcy to protect your assets.

LLC company structure

When your enterprise structure makes you responsible

Experts recommend that new entrepreneurs organize their business as LLC, corporation, and so on. Partnership or sole entrepreneur exposes personal assets to higher risk because there is no legal separation between you and the business.

You are responsible for your company’s debt, and your assets, including children’s college funds, retirement accounts, savings, and family home, are at risk. In this case, filing bankruptcy can help you weather the storm.

Improperly separating your business and personal finances

When you mix your business and personal finances, the court will find that there wasn’t a separate business entity, thus putting your personal assets at risk. This is irrespective of how your business is structured.

So, if you have intermingled your finances, it might be in your best interest to file for bankruptcy to protect your personal assets.

There are alternative ways

Even when you are in the middle of a financial crisis with no light at the end of the tunnel, and your financial assets are at risk, you could have alternative ways of preventing your business going into bankruptcy. Although these options may not necessarily salvage your enterprise, they could help you avoid many credit woes and legal costs commonly associated with the bankruptcy filing.

Before you file for bankruptcy, you may want to negotiate with creditors or go through an assignment for the benefits of creditors. Refinancing or debt consolidation may also come in handy.