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Bankruptcy Petitions Explained for SMEs

We’ve already stressed several times just how vital a healthy cash flow is for small to medium enterprises here in the UK – maintaining a steady cash flow can mean the difference between staying in business or folding for smaller companies which don’t have access to large sums of capital as larger corporations.  Going out of business as a result of debtors who neglect to pay is something to be avoided if at all possible.  When chasing a debt from a customer or client, the strongest action you can threaten is to apply to bankrupt the person or company owing the debt.  Today we’re taking a look at the process of applying for bankruptcy – when this is the best way forward and when it’s better to pursue alternative solutions instead.

If an individual owes you more than £5,000 you can petition the courts to make them bankrupt.  However, for the application to succeed you need to prove that the debt exists and the court must determine that the individual is unable to repay this debt.  It’s also important to be aware that filing a bankruptcy petition will incur costs – both for the court proceedings and for the administration of the bankruptcy if your petition is successful (although these costs will be recovered if the sale of the debtor’s assets raises enough money to cover this).

In the event that a petition for bankruptcy is successful the court will appoint a trustee to collect the debtor’s assets and sell them with the proceeds of the sale being used to cover the expenses of the bankruptcy proceedings.  Any remaining funds will then be used to repay creditors wherever possible.  It’s important to remember that in most cases, creditors who petition for bankruptcy are unlikely to receive payment in full.

Petitioning for bankruptcy is an expensive undertaking and often does not lead to full debt recovery though there are certain situations where it makes sense to do this.  If your debtor is in dire financial straits and a sale of assets is likely to result in partial repayment or if you think your debtor is able to pay but refusing to do so.

In most situations, other solutions are preferable as petitioning for bankruptcy is unlikely to result in full payment.  Before petitioning the courts for bankruptcy, you should try the following methods of recovering monies owed:

  • Communication – phone calls, letters and emails to your debtor
  • Mediation – a mediator could help resolve any dispute out of court which is a cheaper for all parties than legal action
  • A Debt Collection Agency – will take charge of the debt recovery process for you and, as an experienced professional, is likely to achieve the best result.  Using the services of a collection agency that operates on a no-win, no-fee basis is the most affordable option.

Wherever possible, it’s best to reach an agreement with your debtor as this is the most likely way of securing a repayment and using a bankruptcy petition should only be considered in severe situations or as a last resort.