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Bankruptcy and liquidation are often interchanged when discussing solutions for businesses and individuals dealing with a financial crisis. However, these two terms do not have the same meaning. Both may involve insolvency — which is the inability to meet debt obligations — but that is where the similarities end.

What Is Bankruptcy?

Bankruptcy is strictly for individuals and is a legal process that occurs when someone is unable to pay their debts. It is always best to enter into voluntary bankruptcy rather than waiting for the courts to order it. Individuals can petition the court when filing for voluntary bankruptcy. Involuntary bankruptcy occurs when one or more creditors petitions the court and the courts issue a judgement. Creditors must be owed at least $5,000 to file for judgement against individuals. 

It is important to note that if a court issues a judgement against you, it creates a lien on the debtor’s property that does not automatically get dismissed.

When to Choose Bankruptcy

Bankruptcy is a formal legal agreement that can free individuals from the burden of their debts. Whilst opting for bankruptcy provides a solution for those fraught by anxiety from debts that they are unable to repay, there are options to consider before filing.

Individuals can:

  • Reach out to creditors to ask for more time to pay.
  • Work with a financial counsellor who can help organise their finances.

Debt agreements are another option for individuals. They are a formal way to settle debts without going into bankruptcy. Individuals who wish to go this route must meet eligibility requirements. Creditors agree to a set amount of money from the debtor. Once that sum is paid, the debts are considered settled. 

Note that there are consequences to debt agreements. They remain on your credit report for five years or more, and your name stays on the National Personal Insolvency Index for five years or more.

What Is Liquidation?

Liquidation is the insolvency process available to companies unable to pay their debts. It also is the only way for businesses to legally wind up and cease operations.

As with bankruptcy, liquidation is either voluntary or involuntary. Voluntary liquidation can be initiated by a company’s shareholders or its members. If a creditor files a petition to recover monies owed, liquidation can be court-ordered.

Liquidation is the right decision if companies:

  • Cannot repay debts to their creditors
  • Cannot meet obligations to the Australian Tax Office (ATO)
  • Are too small to engage in Voluntary Administration
  • Have limited assets that would allow them to continue conducting business

Once the liquidation process begins, a liquidator will either be selected by the company (voluntary liquidation) or appointed by the courts (involuntary liquidation). The liquidator takes control of all assets and performs a detailed investigation into why the company failed. A final report is issued to the Australian Securities and Investments Commission (ASIC) once the liquidator finishes the enquiry.

Seeking Help from the Professionals

If you have made the decision to file for bankruptcy or liquidate your business, trust the professionals to guide you through the process. We have more than 30 years of experience assisting clients throughout Australia about insolvency, bankruptcy, and debt management.

The Australian economy is affected by several soft factors that can push a business toward bankruptcy. Interruptions in global trade due to COVID-19 and record-high unemployment rates are all driving forces.

Small businesses were hit especially hard during the first two quarters of the fiscal year, and the hurting does not seem to be ending anytime soon. Even with government schemes in place to assist, no industry sector is spared, and no company is immune to financial distress.

Follow the Signs

There are warning signs of impending financial collapse if immediate steps are not taken to set things back on track. Business owners who pay attention to these cautionary indicators often can right the ship before it is too far off-course to be saved.

1. You are losing clients/customers

It is perfectly normal to cycle through clients from one year to another, depending on the nature of your product or service. An ongoing decline in sales without the potential for replacement of lost revenue is a sign it may be time to hire a financial advisor to strategise.

2. You are losing your best talent

Employee turnover eats into any business’s budget. Searching for suitable replacements, onboarding, and training new hires can be time-consuming and costly. It takes the average Australian company 39.2 days to fill vacant roles. One-off staff departures are normal and not a sign of trouble. But when your best and brightest start dashing toward the exit at once, it is time to address the underlying issues.

3. You have a cash flow shortage

Cash flow shortages are somewhat normal, especially for small businesses. Clients that are slow to pay and tightened lending criteria contribute to this issue. If this is an ongoing problem, it is time to take action to prevent it from winding down your business for good.

4. Your expenses are escalating

Spending money faster than you earn it is never a wise financial strategy, yet it is an issue with which many businesses struggle. If your business is operating in the red more than the black, it is time to get brutal about trimming expenses. Working with a financial advisor who specialises in business insolvency can help.

Trading While Insolvent

Unlike the other warning signs, trading while insolvent is a final cry for help for any business. The practice also happens to be illegal, which can open a whole new can of worms for businesses already struggling financially. If matters have gotten to this level of seriousness, your business is in immediate need of help from a financial advisor skilled in financial insolvency. Getting the right advisor on board quickly can mean the difference between your business failing or restructuring and rebuilding.

The Bottom Line

While not all of these signs mean a business is headed toward Insolvency, they are common indicators of financial struggle that should never be ignored. The knowledgeable team at Doug Constable Group can help get your business back on solid footing. Reach out today to schedule a no-obligation consultation.