What Causes Businesses To Go Bankrupt

Bankruptcy is one of if not the worst thing that could happen to a business.

Not only can it spell the end for the entire company, but it can affects employees, partnering businesses and directors. However, while bankruptcy is a common term, many still aren’t aware of the primary reasons that can cause it.

If that’s you, please read on as we discuss what causes businesses to go bankrupt.

Top reasons Why Businesses Go Bankrupt

In 2019 over 10,000 businesses in the UK went bankrupt. And that was in a pre-pandemic world.

In the US (as with the rest of the world), the picture looked even bleaker in 2020 and moving into 2021. Covid 19 played a role in a number of big US businesses declaring bankruptcy. While in the UK, it is estimated that 900,000 small businesses are at risk of failing due to the pandemic.

Covid 19 aside, there are some other common reasons why businesses go bankrupt.

Financial Troubles

If a company can’t maintain a positive cash flow and generate enough revenue, it could negatively affect its financial stability. For startups and small businesses, not receiving enough or, worse, any funding from VCs or investors can lead to failure, thus bankruptcy.

And it’s not just funding. Startups need to keep an eye on expenses to make sure they don’t start accumulating debt.

Unwise Corporate Decisions

As a business is about management, making bad decisions and unwise strategies can lead to bankruptcy. It could be a pivot to a new market, manufacturing processes, or focus for a particular goal. Whatever it may be, every decision counts and can affect its stability and position in the market.

Having bad agreements in place or not putting agreements into writing can cause significant legal headaches. Agreements could be with partners, directors and employees.

Market Instability

Since the market is volatile, it’s uncertain what product will boom next, what company will rise, and what type of business will hit a snag. Accordingly, new competitions, failure to adapt to the market, and sudden economic changes can potentially make a business close.

For businesses in the UK, much instability was (and still is) caused by Brexit as businesses and consumers try to navigate any new regulations around trade.

Some startups have already reported significant increases in paperwork due to Brexit.

Tax Issues

If a company can’t manage its tax correctly, it could highly affect its financial position. Filing late or inaccurately can incur additional fees and penalties. Lastly, due taxes in the past months can add up.


Accidents like fire, theft, storms and other external causes can, unfortunately, lead a business to go bankrupt. When an accident destroys the office, damages tangible assets, and renders essential tools and machines useless, it can take time for a company to recover. While some can survive with insurance or investor’s help, many will still choose or cannot take action to avoid bankruptcy.

Final Words

Bankruptcy can happen due to financial issues, market instability, tax irresponsibility, ineffective strategies, and unwanted accidents. While many businesses gave up, others also strived to stay afloat. With careful planning, good market strategy, punctuality, and considerations for the future, a company can succeed and have enough resources to avoid bankruptcy.

7 things to know about doing business internationally

There are a number of factors to consider when doing business internationally. If you are wondering how to do business internationally, you must ask yourself some questions first.

How do I want to structure my business?

There are many different business structures to consider, each with its own benefits and drawbacks. The most important thing to consider is how much money you are making. Figure out what you want to do, then choose a structure that will get you there.

If you are just starting out, an LLC or corporation may be best because of the limited liability it offers. If you have enough money to hire people, an S-corp is a good option because it has lower administrative costs than a C-corp. You can be your own boss but still have the benefits of being a corporation.

If you have enough money to pay yourself a salary and cover all of your expenses without taking on debt, then an LLC or Sole Proprietor may be the way to go. But if your business is growing and will need financing, or if there is a possibility that you might not meet your financial obligations, then a C-corp or S-corp may be right for you (these apply to US businesses specifically).

What kind of partnership agreement should I make?

Businesspeople are often so eager to get moving on a deal that they overlook one of the most important decisions they’ll ever make: what kind of partnership agreement to make?

You can have two kinds of agreements. One is an informal partnership. You are partners with the owner of the business, and if either of you moves on, the other one gets to take over the whole thing.

The other kind is a formal partnership. It is like a limited-liability corporation (LLC) or a corporation without stockholders; it has its own legal personality; you can buy and sell shares in it; and if you move on,  your shares don’t go to your heirs but are offered for sale.

Will I require a letter of credit?

When you are doing business abroad, one of the first things you will need to do is arrange payment. This is easier to do if your customer does not have a bank account in the same country as you. 

Most banks will refuse to issue letters of credit for payments made to accounts in other countries.

The exception is when you are dealing with an international company that does business all over the world. 

Such companies may be able to provide you with a letter of credit that states that they will be liable for making the payment required by your contract.

A letter of credit requires you to present your claim on funds in the issuing bank’s local currency. You will need someone who understands how letters of credit work and can advise on whether this would suit your needs.

Will my payments be made in U.S. dollars or foreign currency?

If you’re doing business internationally from the U.S., , you’ll need to decide whether your payments will be made in U.S. dollars or foreign currency. 

There can be several advantages and disadvantages to both approaches, so it’s a good idea to thoroughly examine the situation before deciding which method is best for your business.

One main advantage of making all payments in U.S. dollars is that you only have to account for one currency exchange rate on monetary transactions. 

This is significant if your company does business in more than one country, especially if those countries use different currencies. 

Using the same currency for all transactions simplifies recordkeeping, reduces accounting errors and can make bookkeeping easier. However, there are also some disadvantages of using U.S. dollars in international trade.

If you use U.S. dollars, you also need enough cash on hand to cover your expenses when they occur, whether that is in the United States or overseas. This may require that your company maintain a large amount of liquid assets in U.S.-dollar-denominated assets on hand at all times, which could have an impact on the efficiency of your company’s cash management system and overall liquidity needs.

What price will I sell my products and services for globally?

For example, if you are selling electronics, you probably want to have them be just as cheap in Brazil, Mexico, Saudi Arabia, Germany, China, Japan and the United States.

As you expand internationally, it’s important to realize that price isn’t the only thing people are paying attention to. For example, they may want something that is inexpensive but they also want it to be prestigious. They want everyone to know that they paid a lot for their product or service. This means that some of your competitors may be able to charge more than you do while still selling more units.

When entering international markets for the first time you can find yourself at a disadvantage because of things like cultural differences. You need to be respectful of cultural differences when entering new markets. Do some research on how people in different countries perceive things like quality, service and the value of your product or service.

Will I need to negotiate new agreements with manufacturers and distributors and what type of contract(s) will I use? 

If you are planning to expand your business internationally, you must first determine if your product will be successful in the new country. If the answer is yes, you must begin to negotiate new agreements with manufacturers and distributors. It is important to know what types of contracts you will use.

Once you have analyzed your market and decided that the product you are selling will be successful, then it is time to go ahead with negotiations. 

The first step would be to contact a legal firm in the foreign country or a law firm specializing in international trade. They will give you advice on what type of contract(s) will need to be drawn up for each area of operation.

One of the most important factors in determining what type of contract(s) will be needed is whether or not you are dealing with a foreign government. 

Government contracts are usually awarded through an open bidding process, which requires a different process for negotiating and drafting contracts than private sector agreements.

Do I need to register my trademarks, copyrights, patents and/or licensing agreements with the countries in which I do business? 

You may need to register your trademarks, copyrights, patents and/or licensing agreements in the countries in which you do business. 

The majority of countries require an application to be made by a local representative. Some territories also require the filing of a Declaration of Use or Excusable Nonuse.

You should ensure that your applications are filed correctly in order to avoid future difficulties in defending your rights in the country.

You should also consider seeking advice from a local attorney before filing, especially if you are dealing with “gray market” products or entering into licensing agreements for products that are protected by foreign patents or trademarks that are registered but not licensed in your home territory. 

They may be able to help you negotiate with the owner of the rights so that they agree to grant you a non-exclusive license.

Is It Better To File Bankruptcy Before or After Divorce?

A divorce can be a challenging experience in your life. It can be even more stressful if you are going through bankruptcy at the same time.

Whether you should file for bankruptcy before or after your divorce will depend on the situation. You could go through both at once, but some jurisdictions will focus on one point over another.

When To File For Bankruptcy Before a Divorce

  • You can file for bankruptcy first if you have substantial marital debts. A bankruptcy can cancel out some of these debts that would be divided during the divorce proceedings.
  • Filing first is also best if you have various properties that might be divided between you and your partner. By liquidating some of these assets, the divorce process will be easier to manage and less expensive.
  • You can also file before the divorce if you have concerns about legal fees. Filing a joint bankruptcy will be more affordable than if each person filed separately.

When To File For Bankruptcy After a Divorce

  • You can file for divorce first if you could qualify for a Chapter 7 declaration after the divorce. You will qualify for Chapter 7 if your income is below the median in your state. It is easier to get here if you don’t earn as much money as your partner.
  • You may also have an easier time paying off a Chapter 13 declaration after a divorce, as the amount you would spend each month in the repayment process will be minimal. This point works if you earn a consistent income and have enough money on hand to handle some of these expenses.

Check the total values of your debts and assets before deciding when to file for bankruptcy. Look at the types of debts you have and your income to see what can work the best.

Does bankruptcy clear divorce debt?

When a divorce happens, the spouses often have a divorce agreement, a marital settlement, or any contract of the sort. These types of arrangements mean financial responsibilities for the parties involved. That’s why it is a common sight to see bankruptcy happen not long after a divorce.

However, because bankruptcy means being excused of many of your debts, does this mean that you are also relieved of your divorce settlement? The answer is YES.

Any financial settlement enforced by the court can be jeopardized by bankruptcy. Divorce is no different. You can discharge your separation agreements by filing for a Bankruptcy Chapter. There are two of them, Chapter 7 and Chapter 13.

Choose Chapter 13

Here’s why.

Without a unique argument, which is mostly very challenging to have, Chapter 7 will not pardon you of any dissolution-related debts.

On the other hand, Chapter 13 bankruptcy, also referred to as a wage earner’s plan doesn’t ask for that. And, it covers various types of debts.

Responsibilities That Will Remain

Even with all its perks, Chapter 13 doesn’t free you from all of your obligations. Here two of the most common responsibilities you can’t escape from.

Child Support

Most of your fiscal responsibilities as a former spouse may go away, but your accountability as a parent stays. Child support is a priority debt that can’t be diminished.


Alimony, the financial support that the court orders a person to provide for their spouse after a divorce will also remain. Any debt in the nature of support, maintenance, or alimony is excepted from discharge.

Bankruptcy Validity

Just like all cases, the court needs to make sure your bankruptcy is valid before they approve of it. Do not abuse the function of Chapter 13 bankruptcy. Because if you do, the court will cancel your case. This will consequently allow your former spouse to make his or her claims.

How does bankruptcy stay on your credit report?

Being bankrupt is such a mess and a hassle for an ordinary person like you. Bankruptcy is caused by the non-payment of debts of an individual or entity to their lenders or official receivers. The debtors filed a relief in some or most of their unpaid or unsettled debt.

You are also wondering if how long does bankruptcy stays on your credit report. You are worried that if you don’t pay your debts on time, you will not lend again or apply for mortgages and other related matters. Sometimes, your new employer or new landlord will ask for your credit profile to know if you can pay. In the United Kingdom, your bankruptcy records will show up to 6 years. Although, for usual circumstances, your history will stay in your profile for 12 months after you have correctly settled your unpaid dues. Your lenders will take you to court if you are unable to determine your debt, and they will require you to pay it, therefore, prolonging your bankruptcy record in your credit profile

How long does bankruptcy stay on your credit report.

After 12 months of bankruptcy

In the United Kingdom, particularly in England, Wales, and Northern Ireland, your lender will let you pay for 12 months to settle your dues. During these months, you are restricted from borrowing and give ample time to pay. After paying for 12 months, your lender will discharge you from bankruptcy, and therefore, your record is removed from your profile. Although, you take note that you should be honest about your previous financial history as some companies require you to disclose your current financial situations.

After 15 months of bankruptcy

If you are dishonest with your financial statements, your lender or official receiver will take you to court to have you included in the Individual Insolvency Register (IIR). IIR is the list of bankruptcy restrictions and debt relief register in the UK, which will let you pay your dues after 15 months from your date of bankruptcy.

After 27 months of bankruptcy

If you cannot pay your dues after 27 months of bankruptcy, your lender will put more restrictions on you. They will put up your property for sale, and worse, they will decide more on what to do with your property every after nine months should you continue to break their rules on payment.

After six years of bankruptcy

Dishonesty and breaking your lender’s rules will not do you good. After six years of non-settlement of your dues, your lender will apply for Bankruptcy Registration Undertaking (BRU). BRU is an order where the lender will further give restrictions to you for two to 15 years, depending on the severity of your disobedience to your lender.

Your bankruptcy records will stay in your credit report for 12 months up to 6 years, depending on the severity of your actions to your lenders or official receivers. You should settle your debts with your lender within 12 months of your bankruptcy so you will be discharged after. Therefore, less hassle and worry for you should you decide to borrow money again.

What Is the Downside of Filing For Bankruptcy?

Filing for bankruptcy can help you discharge your debts and will produce an automatic stay against creditors. Some of your debts will also be written off after your bankruptcy is discharged.

But there are problems that come with filing for bankruptcy. Here are a few of the more prominent concerns to note before filing:

  1. You could lose various assets in court. A bankruptcy court can seize assets like a car or a house. The court could sell these items to pay off your creditors, especially if they are valuable enough.
  2. It may be difficult for you to obtain a loan, a mortgage, or a credit card after declaring bankruptcy. Your credit score will experience a substantial hit.
  3. You might also struggle to find a job or a new home. Employers and landlords might notice a bankruptcy in your name and will ask about the situation at hand. These people may find you irresponsible, reducing your risk of being accepted as a tenant or landing a new work position.
  4. You cannot discharge all your debts through bankruptcy. You cannot discharge student loans, alimony, child support, or any criminal restitution charges.
  5. Your bankruptcy will stay on your credit report for years. It can remain for at least six years in most cases. The timeframe will vary by state or country, but it can be extensive.
  6. The only financial services or products you will qualify for will be more expensive ones. You can find unsecured credit cards and other items that can help you rebuild your credit. But these often come with exorbitant fees and lofty interest rates.
  7. Your bankruptcy will be disclosed to the public as part of your record. You may request a court order to avoid releasing your address data if you are concerned about being a victim of violence. You’d have to provide proof of your concern in this situation.

How Many Times Did Donald Trump File For Bankruptcy?

Businessman and former American President Donald Trump has expressed himself as one of the savviest businessmen and politicians in American history. But he hasn’t always done well with his funds, as he has filed for Chapter 11 bankruptcy six times in the past.

How Can He File So Much?

The reason Donald Trump has filed for Chapter 11 bankruptcy six times is that the practice focuses on reorganizing debts. A Chapter 11 bankruptcy entails a debtor proposing a reorganization plan to keep the business running while also paying off debts.

A business can still operate while under Chapter 11 bankruptcy, but it will do so under the supervision of a bankruptcy court. The business must provide a corporate budget and a plan for paying off those debts. The effort can include a schedule for when someone will pay off everything.

The Chapter 11 process is different from a Chapter 7 or 13 bankruptcy, as Chapter 7 entails liquidating one’s assets. A Chapter 13 declaration is for personal purposes and is for debtors who have some sort of disposable income and does not entail liquidation.

Multiple Bankruptcies Can Occur At Once

Three of Donald Trump’s six Chapter 11 bankruptcies occurred in 1992. He declared bankruptcies on two Atlantic City casinos that he operated and a third on his Plaza Hotel property in New York City. These three bankruptcies entailed separate plans for how Trump would manage the debts he owed for these individual properties. A Chapter 11 bankruptcy will focus on a single business item, although some people may combine multiple assets in the same declaration.

You Can Recover After Bankruptcy

Donald Trump would declare Chapter 11 bankruptcy two more times after 1992, with the most recent being in 2009 when he declared bankruptcy on his Trump Entertainment Resorts business. But Trump continues to own various prominent and profitable assets to this day. His financial struggles didn’t seem to hurt him when becoming one of the world’s most powerful political figures.

How can divorce affect a family business?

The end goal for a divorce is to find a way to disentangle two lives that have grown increasingly more intertwined with each year of marriage, including a multitude of issues around child care, finance, and in some instances, a family-run business that will be affected by the separation.

A divorce can obviously impact a business that both spouses, co-created, grew together, or even where one spouse played a minor role. Separating business owners should be made aware that the company will equally be affected regardless of whether their spouse had or had no involvement in the business activities. Lenore Rice from UK law firm Wilson Nesbitt Solicitors explains the impact of divorce on the family business:

A business is an asset. It also forms part of all the assets that make up a couple’s joint wealth, along with their home, any other property, cars, and other valuable items.

As opposed to being settled privately by way of a matrimonial agreement, the clients’ separation of finances will be dealt with by the courts. In which the goal will be to reach a fair division of assets including the couple’s joint wealth. Then, make a decision on how the sum total of their wealth should be fairly divided.

While the starting point for the court will be a 50/50 division of assets, it will look at a large number of factors, including but not limited to:

  • the earning potential of each spouse;
  • who will be the resident parent of their children (if applicable);
  • the standard of living enjoyed during the marriage; and
  • other factors that it would be fair and reasonable to take into account.

There is a possibility to divide the assets in a way that reaches the division in which the court believes to be fair and reasonable. It is often the case that a property or a business represents a majority of the wealth and the court may determine that a sale will be required in order to facilitate a fair division of the assets.

The family court will be slow to break up a family business. There may also be other options available, such as:

  • one spouse buying out the share the other is deemed to be entitled to; or
  • liquidation of some assets of the business in order to achieve the settlement the court has arrived at.

Asset sales are a last resort because it holds such a huge impact on the capacity of the business to perform. If the court decides that the family business does have to be involved in the divorce, they will then have to deal with issues around:

  • the valuation of the company and its assets;
  • shares or interests of other family members,
  • financial contributions made to create and grow the business; and
  • other matters which will affect the share entitlement of both spouses.

Do you need a solicitor for setting up a business?

As long as you’ve covered all bases, setting up a business can be rewarding

How crucial is having a business solicitor?

Normally, having a solicitor just gives you the peace of mind that you need while running a business. One can help you with complexities, save you time, effort, misery in the future, and even money.

Register a business without a solicitor

A solicitor isn’t exactly necessary for you to start a business as there is no legal requirement that ties you to seek advice or support from a solicitor when you set up your business.

What a solicitor cannot do for you and where else to look

In getting a solicitor, there are things that you do not need legal expertise for, such as:

  • having an idea;
  • writing a business plan;
  • market research; and
  • Choosing a business name.

Your company structure

Your business structure is vital to your success as you begin and expand.

If you are in partnership with other people in your business, you will be needing a shareholders’ agreement or partnership arrangement to ensure that you get fair return for your financial or non-financial investment.

Your solicitor will be able to explain the different options you have and advise you which one is the best for you and for your business and which you should set up—partnership, limited company, or limited liability partnership.

Business premises

It is important that you fully understand the terms of the lease when you finally choose your business premises. Ask yourself (and your solicitor) the following property questions:

  • Can the landlord increase your rent? If so, by how much?
  • Will you find yourself paying ever-increasing service charges?
  • Will you need planning permission for a change of use?
  • What are the restrictions if you choose to run your business from home?

Financing and taxes

You need to know what financial resources are available for you and what their legal implications are. Ask yourself :

  • Should you mortgage the family home?
  • Are lenders insisting on unfair terms?
  • Could you be getting a better deal with your bank?

Your solicitor will be able to explain these areas and may even help in negotiating with finance on your behalf. Your solicitor may also give you advice on issues such as the best time to start your financial year and tax implications of different business models.

Goods and services

It is important to know your legal duties when buying or selling goods and services. A solicitor can cover all the following questions in detail and refer you to a specialist, if necessary:

  • What could contract terms mean for your business?
  • What about product liability?
  • What can you legally say in adverts and promotional materials?

Get help with commercial contracts at sanderswitherspoon.co.uk.