In 2012, business bankruptcy filings totaled over 42,000 in the United States. While poor economic conditions played a major role, many of these could have been avoided if the business owner had taken preventative action before it was to late.

Here you will learn all you need to know about business bankruptcy and what you can do to avoid it. You will also learn exactly what you need to do if you have no choice but to file for business bankruptcy.

How to Avoid Business Bankruptcy

If you are facing business bankruptcy it is easy to give up hope and accept what seems to be the inevitable. However the first step to avoiding bankruptcy is to recognize that you do have viable alternatives. While avoiding bankruptcy will require a mixture of negotiation, creative thinking and quick action it is possible.

Here are the best ways for you to avoid filling for business bankruptcy:

Renegotiate  Your Contracts, Leases and Loans

Facing bankruptcy can actually put you in a stronger negotiating position when dealing with lenders and vendors. They know that if you are forced to declare bankruptcy then any debt owed to them will probably be discharged. Explain your situation to them and that you need to renogotiate any contracts, loans, or leases. Often they will be willing to accept a lowered amount of money each month if the alternative is you entering bankruptcy.

Discuss Purchasing Goods on Consignment

Talk to your vendor and ask them if they would be willing to provide their goods on consignment. This means that you pay for them when they sell. This can significantly decrease your overhead costs and your risk.

Look For Additional Sources of Cash

If there is one primary cause of business bankruptcy, it is having insufficient cash. Of course, obtaining financing when your business is performing badly is easier said than done—but it is possible.

Look to see if there are any assets that could be sold off. Consider laying off staff in order to reduce your payroll costs. And look at third tier lenders for financing. The interest rates they charge may be higher but they can provide a bridge until you are able to work through your problems.

How to Declare Business Bankruptcy

If you have exhausted all of your alternatives then declaring business bankruptcy maybe your next best move. There are actually three different types of business bankruptcy that you can file for. If you are a sole proprietorship you will have the option of filing either chapter 7, chapter 11 or chapter 13 bankruptcy. For all other business structures your choices are either chapter 7 or chapter 11 bankruptcy.

Chapter 7

This type of bankruptcy will result in complete liquidation of the business. It is usually the best choice when the business has few or no assets or no viable future. When you declare chapter 7 bankruptcy the bankruptcy court will appoint a trustee who will be charged with distributing the remaining business assets among the creditors.

Chapter 11

During Chapter 11 bankruptcy, the business is reorganized but continues to operate. The party responsible for the business reorganization will be nominated by the court and can be the current business owner. A plan for how the business will deal with its creditors will be formulated. The bankruptcy court will then need to decide whether the plan is fair and equitable. If they find it is then it will be approved.

Chapter 13

Chapter 13 bankruptcy is only available for sole proprietorship because the business is not considered a separate legal entity from the owner. As this is a type of reorganization bankruptcy, it can be preferable to filling chapter 7 bankruptcy, which can place personal assets such as your home or vehicle at risk. When you file for chapter 13 bankruptcy, you will need to propose a repayment plan for the bankruptcy court to approve.

Because of the depressing circumstances that surround bankruptcy, developing the right mental state to avoid it is often the hardest part. However, remember all of the work that has gone into building your business. It is never too late to save your dream.

Author Bio:

Biljana is an online writer and a blogger researching and publishing useful info on bankruptcy topics based on knowledge and experiences shared by business bankruptcy professionals.