Chapter 7 bankruptcy and Chaper 11 bankruptcy are both common options for businesses in declaring bankruptcy. The key differences essentially amount to inventory liquidation vs. a reorganization and restructuring of debt. A business may liquidate through the bankruptcy process by filing a petition under either Chapter 7 or Chapter 11. liquidation buyers often take advantage of bankruptcies because there is an opportunity to buy closeouts and obsolete merchandise at prices far below regular costs. But the primary purpose of a Chapter 7 bankruptcy is to liquidate the debtor’s non-exempt assets, make a distribution to creditors, and for the debtor to receive a discharge from debts, giving the debtor a fresh start. Chapter 7 cases are typically only filed voluntarily by the debtor. When a business is closing and shutting down it's warehouse they must sell old inventory, closeouts and excess inventory in an effort to generate as much cash as possible.
The primary purpose of a Chapter 11 bankruptcy is to give business entities and individuals with large amounts of debt an opportunity to reorganize their financial affairs. The debtor in Chapter 11 ordinarily files a plan of reorganization to be voted on by its various classes of creditors. The plan may provide for restructuring of the debtor’s debts. Alternatively, the debtor can conduct a company sale under direction by a liquidating plan that distributes the sale proceeds to creditors. When this happens the company liquidates closeouts and may be shutting down a warehouse. The business has no choice but to sell old inventory to liquidation buyers, and reduce inventory while accumulating cash.
Operating a business through a limited company offers various benefits compared to running one as a sole proprietor, including the ability to avoid personal liability for your company’s trading debts. This means that you can protect your personal assets if the closeout business fails. If you and your company are unable to pay the debts, then the consequences would be your company going into liquidation, and you become bankrupt. When a company has too much inventory in the warehouse and sales slow down too much, it is possible to become insolvent. One way to avoid this problem is to always get rid of dead inventory and closeouts early and while they have value to overstock liquidators. Sometimes when old inventory sits too long in the warehouse, it can lose all of its value because the packaging changes color and the merchandise tends to look old. It is better to get rid of excess inventory while it has market value.
Liquidation and bankruptcy refer to two different events that occur when your limited company becomes overwhelmed by debt. A limited company owns all the assets that the business has acquired over time, and is also liable for any debts incurred. The directors or shareholders of the company are not personally liable for the company’s liabilities, including trading debts. This can also lead to shutting down a warehouse or completely closing down operations in an effort to stop the bleeding and stop losing money. Sometimes a company can be turned around by liquidation specialists who can buy all the obsolete inventory that is not longer selling, infuse cash into the business, and gift it an opportunity to flourish again.
However, there are instances when banks, suppliers, and other creditors may ask you as a director to give a personal guarantee against any unpaid liabilities of the company. As a result, if the company is unable to pay, then you can be legally liable for the debt under guarantee. In situations where both the company and you are under financial pressure from creditors demanding payment, you may seek professional help from a financial advisor. But if the company continues to operate and incur debts, despite its inability to pay when they are due, then you might become personally liable for those debts, irrespective of whether or not you gave a personal guarantee.
Business failure can cause a brush with the law, risking asset recovery actions and penalties if you don’t comply with certain legal obligations as a director. It’s important that you consult a qualified financial advisor as soon as you realize that you’re unable to keep up with the payments for your company debts. This advisor may be an insolvency accountant or lawyer, a registered trustee if you want to consult about your personal financial situation, or a registered liquidator if you want to discuss your company’s dire financial situation. If your business is struggling and you are in need of liquidating inventory, you can do a simple Google search for the following terms: sell old inventory, liquidation buyers, closeouts, buyers for overstock inventory, closeout brokers and wholesale liquidators.
Keep in mind that the specialist you choose to meet with can provide preliminary advice at no cost. However, if the court appoints the trustee or liquidator, they will not act for you, but for the benefit of your company creditors. Otherwise, if your company has failed, but you’re solvent, you should seek professional financial advice to determine whether you should voluntarily put your insolvent company into administration or liquidation, or wait for a creditor to apply for the same through the court. Seek an appropriately qualified specialist to assist you through this process. Wholesale closeout liquidators are accustomed to dealing with these situations, and they are professional liquidation buyers with years of experience.
Keeping bankruptcy and liquidation separate is important for helping people and businesses manage their finances. For instance, a struggling company may be liquidated without affecting the personal finances of its directors or shareholders, depending on the company structure. Similarly, you can declare personal bankruptcy without affecting the finances of a business, although bankrupt individuals are disqualified from being a director of a company. If your company has a large inventory on the books and you have an opportunity to get rid of all the dead stock and sell of the obsolete inventory, you can use the cash to pay of debt and restructure. It may also make sense to downsize your warehouse or even close your 3PL warehouse where you are probably paying high storage fees to warehouse old inventory.
Whether you are having trouble with your own finances or are concerned about the state of your business, seeking professional advice early on is key. SV Partners works with both individuals and companies, helping you manage financial strain and work towards the best possible outcome. With a team of highly experienced trustees and liquidators, There are numerous circumstances which can result in a company becoming insolvent, but the end result is the same – the company runs out of cash. Insolvency is where a company either cannot meet its liabilities as they fall due and/or where the value of company liabilities exceed its assets. This can be the result of poor management that does not understand the value to getting rid of dead stock, selling excess inventory, and liquidating overstock inventory. It may also be from slow sales and lack of inventory turnover. Sometimes, a very large canceled order in the warehouse can be enough to throw a company into inventory liquidation and bankruptcy.
Like bankruptcy, the closeout process and liquidation process can be instigated by the company’s directors or creditors. During the liquidation process, a licensed insolvency practitioner acts as liquidator and liquidates (i.e. turns into cash) all assets and distributes any proceeds amongst creditors. Following the distributions of cash, the inventory liquidator will investigate the conduct of the directors in the period preceding the liquidation for any wrongdoing or neglect of duties. (*) Solvent companies can also be liquidated using a process known as a members voluntary liquidation (MVL), which can be a tax-efficient way of shareholders withdrawing their investment in the company. Following the liquidation, the company will be dissolved and records struck off at Companies House. Thereafter the company will cease to exist.
Bankruptcy is a term used in relation to individual and sole trader debts, which can occur as a result of poor money-management or reckless spending, or in the case of a sole-trader, a downturn in business or an unexpected out-payment. Bankruptcy is a process which generally lasts for a year but will affect an individual’s credit rating for six years. Inventory liquidation, on the other hand, relates to the business debt of limited liability entities only. It is the process by which the company assets are realized and sold to pay back creditors, then the company is dissolved.
Merchandise USA has been an inventory liquidator for more than 38 years. We specialize in buying excess inventory and closeouts of housewares, toys, sporting goods, lawn & Garden and overstock pet products. If you are shutting down operations or need to find a closeout broker, contact us today. We work with wholesale closeout distributors, closeout websites and closeout brokers.