When to Consider Selling Assets vs. Filing for Bankruptcy in Business

When your business faces significant financial challenges, the path forward can feel overwhelming. Two common solutions are selling assets or filing for bankruptcy. Each strategy comes with distinct advantages and hurdles, and choosing the right course of action requires careful thought about your current financial situation and long-term goals.

In this post, we’ll help you understand the key differences between selling assets and filing for bankruptcy, so you can make an informed decision about which approach is best for your business.

Table of Contents

1. Understanding Your Options: Selling Assets vs. Bankruptcy

Selling Assets

Selling assets involves liquidating parts of your business—like equipment, inventory, or real estate—to pay off your debts. This approach can help reduce liabilities without going through the court system. It also allows you more control over the process, and your business can maintain its reputation while solving financial problems.

Filing for Bankruptcy

Bankruptcy offers a legal structure for addressing debt. Depending on the type (Chapter 7, 11, or 13), it could involve liquidating assets or reorganizing debt. Bankruptcy proceedings are often court-supervised and may involve creditor negotiations, with the potential for some debts to be discharged.

2. When Selling Assets Makes Sense

If your business has the potential to recover but needs to reduce debt, selling assets could be the right choice. Here are a few scenarios where this approach might work well:

a. Reducing Debt Without Shutting Down

If your business is still generating income but has excessive debt, selling non-essential assets can free up cash to pay creditors without closing operations. For example, you might consider:

Selling unused equipment or excess inventory.
Downsizing office or warehouse space.

b. Avoiding Bankruptcy

Selling assets gives you a way to address your debts without the stigma, cost, or credit impact of bankruptcy. This can also show creditors you’re acting in good faith, possibly making it easier to negotiate better repayment terms.

c. Transitioning to a New Business Model

If your business is evolving, selling assets can be part of pivoting to a new strategy. You may need to get rid of outdated equipment, close underperforming locations, or discontinue unprofitable product lines to focus on more promising areas.

d. Addressing Priority Debts

Some debts, like unpaid taxes or employee wages, take precedence. By selling assets, you can settle these obligations quickly, protecting your business from aggressive collection tactics.

3. Potential Pitfalls of Selling Assets

While selling assets can help reduce debts, it’s not without its risks:

Operational Impact: Selling key assets could reduce your ability to generate revenue.
Market Value: In a distressed financial state, you may be forced to sell assets at a loss.
Limited Debt Relief: If your debts are far larger than the value of your assets, this strategy might not provide sufficient relief.

4. When Filing for Bankruptcy Is the Better Option

If selling assets isn’t enough to resolve your financial struggles, bankruptcy may be the solution. Consider bankruptcy when:

a. Debts Exceed Assets

If your liabilities outweigh the value of your business assets, bankruptcy can provide legal protections to address your debts. Chapter 7 bankruptcy involves liquidating assets to discharge most debts, giving you a fresh start.

b. Creditors Are Uncooperative

If creditors are refusing to negotiate or are taking aggressive collection actions, bankruptcy can put a stop to them through an automatic stay. This pause gives you time to reorganize or liquidate in an orderly manner.

c. Protecting Personal Assets

If you’re personally liable for business debts, filing for bankruptcy can protect your personal property. For example, Chapter 7 bankruptcy often includes exemptions for essential personal assets, such as your home or car.

d. Business Operations Are No Longer Viable

If your business cannot recover, Chapter 7 bankruptcy provides a way to wind down operations, pay off creditors as much as possible, and discharge remaining debts.

e. Reorganizing Debt

If your business still has potential but needs time to restructure, Chapter 11 bankruptcy allows for debt reorganization. You can renegotiate terms with creditors and continue operating while making a plan to pay down debts.

5. Comparing the Pros and Cons: Selling Assets vs. Bankruptcy

Selling Assets

Pros:

Maintains control over the process.
Avoids bankruptcy’s legal costs and public record.
May preserve relationships with creditors.

Cons:

Limited relief if debts outweigh asset value.
Risk of losing vital business tools or capabilities.
Time-consuming process to find buyers.

Filing for Bankruptcy

Pros:

Comprehensive debt relief, including discharge of qualifying debts.
Legal protections, such as the automatic stay, halting collections.
Potential to reorganize debt and continue operations.

Cons:

Public record can impact reputation.
Legal and administrative costs can add up.
Loss of control over the process in court-supervised bankruptcy.

6. Can You Combine Both Approaches?

In some cases, combining asset sales with bankruptcy may make sense. For example:

Pre-bankruptcy liquidation: Selling assets before filing for bankruptcy can help reduce certain debts or preserve property that may otherwise be at risk in bankruptcy proceedings.
Chapter 11 funding: Liquidating non-essential assets could provide the necessary funds to support a debt reorganization plan.

Before taking this step, however, it’s essential to consult with a bankruptcy attorney, as the court may scrutinize or reverse certain asset sales.

7. How to Decide the Best Course of Action

Making the right decision requires a full understanding of your business’s financial standing, goals, and legal obligations. Here are some steps to help guide your decision:

Assess your financial situation: Take stock of your debts, assets, and cash flow to understand the scope of your financial troubles.
Consult professionals: Talk to a bankruptcy attorney or financial advisor to weigh your options.
Negotiate with creditors: Before jumping into bankruptcy, see if you can work out a repayment plan or settlement with creditors.

Let Dennery Law Guide You Through Your Options

At Dennery Law, we understand the weight of financial struggles and the stress of navigating difficult decisions for your business. Whether you’re considering selling assets, filing for bankruptcy, or a combination of both, our experienced bankruptcy attorneys can guide you every step of the way.