Take measures now before having to file for bankruptcy

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Federal stimulus funds used to prop up struggling businesses during the COVID-19 pandemic have delayed bankruptcy filings so far — but that may be coming to an end.

As federal dollars and commercial loans begin to dry up, bankruptcies are expected to increase starting in the first quarter of 2022 after dipping well below average this year, particularly among those in the automotive, hospitality and health care industries.

That should come as little surprise since our fledgling recovery remains in its early stages. The global chip shortage slowing the manufacture of automobiles, computers, medical equipment and other electronic devices is expected to continue at least through mid-2022.

Banks are likely to start cracking down on bad loans in the first quarter of the new year. In both cases, already-struggling businesses will be negatively impacted even more, with many finding themselves in the hot seat with lenders due to cash flow issues.

Three steps before filing

For many of these businesses, bankruptcy isn’t a matter of “if” but “when.” The good news, though, is there are things organizations can do now to better position themselves to come through a bankruptcy restructuring. The sooner a company gets started in righting the ship, the more quickly it can come out of financial distress. 

For some businesses that find themselves facing bankruptcy, a forbearance agreement with the lender makes great sense. Under this agreement, the business gets time to resolve its financial issues and return to a payment schedule acceptable to the bank.

Before approaching a lender about forbearance, businesses should consider three steps to prepare themselves for a bankruptcy filing. These include: 

  • Paying the important bills, such as taxes, retirement contributions and other obligations to key suppliers that you will need in the bankruptcy. Stay current on federal and state taxes to avoid personal liability for nonpayment.
  • Working with your accountant to make sure your financials are accurate. Accurate financial information, including projections, is essential to any bankruptcy filing or workout. 
  • Hiring experienced professionals. Consider retaining a financial consultant who can help build a plan and draft projections that accurately reflect your organization’s financial condition and rebuild the relationship with your lender. Work with an attorney who focuses on bankruptcy and restructuring to ensure the financial plan meets legal requirements and sets your business up for future success.

Throughout the pandemic, we have been reminded of the fact we live in a global world. We have seen firsthand how the challenges of one company that makes a certain part or product can throw the entire supply chain into chaos. This reality has reared its ugly head in raw material shortages, supply chain snarls, gridlock at our ports and other issues. 

With the right plan and right professional help, struggling businesses can pull through this challenging time, come out stronger on the other side by using bankruptcy protections to restructure debt and position a business for continued success.

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