What is the Downside to Filing Bankruptcy?

What is the Downside to Filing Bankruptcy?

Filing for bankruptcy in the United States is a legal process that allows people with too much debt to obtain relief and protect some of their assets. This process is designed to help alleviate some of the pressure from being overwhelmed with too much debt. Filing for bankruptcy doesn’t mean you are in dire straits, but it allows you to save your credit score and breathe easier, knowing that your debts are no longer hanging over your head.

Downsides of Filling for Bankruptcy

1. Your credit score is likely to drop

Most people who file for bankruptcy end up with a lower credit score than before. Bankruptcy will generally be reported on your credit report, and unlike applying for a new loan, your credit score will continue to drop. The impact of a bankruptcy filing on your credit score depends on where you live, but generally, you should expect your score to be in the low 600s once you file.

What is the Downside to Filing Bankruptcy?

2. Your assets are vulnerable to creditors

If you get behind with your bills and are forced to file for bankruptcy, you will undoubtedly be asked to turn over your assets to have them wiped out. The most significant factor determining how many of help you get is the type of bankruptcy you file under. Filing under Chapter 7 allows the courts, but not the creditors, to seize everything liquid, while filing under Chapter 13 will enable you to keep most of what you own so long as it doesn’t exceed $753,000.

3. A Chapter 13 filing lasts three to five years

The court determines the length of time you must pay under Chapter 13, depending on the size of your debts and your income and expenses. You will be obligated to make payments monthly, usually through a third party or directly to creditors, for three to five years. The payment plan is designed to allow you to pay off 100 percent of what you owe while still keeping one vehicle, your home, and some essentials like clothing and food.

4. Creditors aren’t likely to work with you in the future

Once you file for bankruptcy, your creditors will be less likely to work with you in the future. One of the primary reasons why people file for bankruptcy is because collections agencies and lawsuits are hounding them. Creditors are typically willing to negotiate a settlement. Still, once you file for bankruptcy, they know that they won’t be able to get much, if any, of their money back, so they usually stop trying.

5. A bankruptcy will stay on your credit report for ten years

When you file for bankruptcy, the court will issue a discharge that releases you from your debts and liability. The shot will be reported on your credit report, so no further collection efforts can be made to get the money you owe. The best part is that once the bankruptcy is discharged, it will stay off your credit report for ten years. If a creditor tries to collect even after the ten years have expired, it can be reported again.

What is the Downside to Filing Bankruptcy?

6. You still have to pay your debts

While filing for bankruptcy stops most creditors from trying to collect, it does not absolve you of your obligations. You still owe the money and must still pay if you want to avoid legal repercussions. If a creditor decides to take legal action against you after your bankruptcy has been discharged, they can do so, but it is much more complicated than when the debts are current.

7. You won’t be able to get a debt consolidation loan

Filing for bankruptcy is standard because getting a debt consolidation loan is easy. These loans have become so popular that many believe you can use them to consolidate all of your debts into one manageable payment. It is not the case, however. This type of loan offers no relief from your debts as they are still reported on your report and will not wipe out any of your obligations.

8. The process isn’t easy

The last thing you want to do when facing overwhelming debt is file for bankruptcy. It cannot be evident, and the process isn’t easy. It requires a lot of paperwork and explains every detail of how your debts will be paid off so that you can decide how much you can afford to pay each month. If you believe you might need help filing for bankruptcy, here is a free checklist to help, you get started.

Final Verdict

Filing for bankruptcy is necessary to alleviate some of the strain caused by overwhelming debt. While many benefits come with bankruptcy, you should know about the potential negatives to ensure you’re making an informed decision. If you’re thinking about filing for bankruptcy, or if you believe that it might be appropriate for someone else, make sure you understand the downsides so that you can make your decision knowing everything involved.

What Are the Factors Influencing Dividend Policy?

What Are the Factors Influencing Dividend Policy?

Modern firms have a wide range of dividend policies, impacting their investors. The differences in these policies lead to different expected returns and therefore varying degrees of risk for investors. As an investor, you should know the factors influencing dividend policy. This keeps your money in line with your investment strategy for optimal portfolio performance.

Ownership Structure

Centralized ownership tends to favor high dividend payments, while decentralized ownership tends to favor low dividends. This is because high dividends appeal more to investors with a non-controlling stake in the firm, whereas low dividends are allowed for those with controlling stakes. As a result, firms that operate with decentralized ownership will or tend to pay higher dividends.

What Are the Factors Influencing Dividend Policy?

Market Capitalization

A firm’s market capitalization often dictates dividend policy in today’s market. Generally, firms with higher market caps will pay higher dividends than firms with smaller market caps. As a result, investors tend to look for firms in the highest 10-best sectors and industries that pay very high dividends and avoid those that don’t pay very high dividends at all.

Expectations from the Firm

Firms which are expected to record strong growth in the future are likely to pay high dividends. This is because investors feel that their investment in those firms will more than recoup the dividend payment. Conversely, when expectations for growth are low, investors may expect a lower dividend payment or even no payment, regardless of the firm’s ownership structure or market capitalization.

Earnings per Share (EPS) Growth Rate

Regardless of the ownership structure and market capitalization, a firm’s EPS growth rate influences its dividend payment. For example, a firm expected to increase its EPS by X% in the following year will pay a dividend of Y%. However, a firm with lower or negative expectations for growth may choose to forego dividends altogether. This can be because investors’ investment risk is low or there are no expected EPS growth prospects for the firm (e.g., due to a low market capitalization).

What Are the Factors Influencing Dividend Policy?

Dividend Yield

While owning a stock, investors typically look for stocks that pay dividends higher than what they pay in interest. This drives the share price, and the yields paid to shareholders are driven lower. As a result, firms that pay very high dividends tend to have low or negative yields. Investors also try to avoid paying high dividends if the firm’s share price is likely to fall following a dividend payment.

Dividend Policy of the Firm’s Competitors

The dividend policy of the company’s competitors often influences investors’ expectations and sales growth rate. Investors compare firms’ dividend policies by looking at their relative cash flows and views on future earnings to determine which firms will pay high dividends or, conversely, pay low dividends so that they can all afford to pay them. Competitors’ dividend policies also influence investor expectations of future earnings.

Regulatory Environment

The expected impact of regulations on the firm’s bottom line can lead to changes in dividends paid. For instance, if new regulations that increase the cost of doing business are expected, investors may expect lower dividends or no dividends at all until such time that those costs are more fully understood and can be passed on to customers or absorbed by the firm.

Tax Environment

Firms with higher tax burdens are not likely to pay high dividends. This is because investors do not want to pay taxes on the dividends they receive from their investments, so firms that pay higher dividends often have lower tax burdens.

What Are the Factors Influencing Dividend Policy?

Tax Status of the Firm

Dividends may be taxed differently from other forms of profit distributions. As a result, the firm’s tax status can affect how much it will pay as dividends, affecting investors’ expectations and estimation of the risk involved with holding onto shares of a given stock.

Rate of Return on Assets (ROA)

If ROA rises, investors may expect dividends to be paid at higher rates. Conversely, if ROA is expected to fall, investors may expect lower dividends or no dividends if a firm fails to generate sufficient cash flow from its operations.

Firm Size

Larger firms can afford higher dividends than smaller ones because of their greater size and scale economies on which their high profits can be based. In addition, these larger firms enjoy economies of scale in operations, allowing them to conduct more activities at lower unit costs than smaller firms, which can be seen as differentiating factors of the companies.

Therefore, a small firm may only produce one product or service, but a large firm can produce more variety of products and services in the same amount of time. Hence, they enjoy economies of scope, which make them able to take better advantage of economies of scale.

End Note

The bottom line is that dividend policy is closely tied to a company’s stock price. It is, therefore, crucial to consider dividend policy and its effect on the overall success of a firm. As such, it is important to consider the real factors that affect firm performance and the subjective factors that affect dividend policy. Understanding each of these will help an investor make better investment decisions.

What is Working Capital Management?

What is Working Capital Management?

Working Capital Management (WCM) manages liquidity and capital supply to maximize return. It is a critical aspect of any business as they need to quickly access funds to make payments on their debt, pay workers, buy raw materials and equipment, and pay suppliers. They are maintaining a balance between a business’s long-term and short-term objectives. Companies must have adequate working capital to operate efficiently and effectively and maintain sufficient reserves to provide for unexpected expenses.

Factors Affecting Working Capital Management

1. Dependency on the major suppliers and contractors

Dependency on the major suppliers and contractors is one-factor affecting working capital management. Suppliers sometimes cannot fulfill their part of the deal mainly because they cannot get their hands on needed materials due to a shortage in supply or because they do not have sufficient stock. In such situations, maintaining an emergency supply helps protect your business from being negatively affected by not fulfilling your obligations to your clients or customers.

What is Working Capital Management?

2. Cash Management Strategy

Cash Management Strategy affects working capital management in several ways. One of the ways is that it affects the amount of cash you have access to in each business cycle. In general, a working capital management system should enable the fast release of funds from the firm’s bank account to maximize cash flow and minimize the risk of overdrawing your account.

3. Nature of the Business

The nature of the business can affect working capital management. If a company has a high rate of returns from its suppliers, it can do without massive cash in other areas as more money flows into the firm. If this is not the case, you may need to secure long-term financing or finance options to run operations while waiting for the debt to be repaid.

4. The organization’s liquidity position

The organization’s liquidity position affects working capital management because the amount of cash available to act as a buffer against short-term demands is a direct function of the organization’s ability to produce some money. If the firm has more cash, it can use this to ensure it can meet its financial obligations. However, if the firm has no money coming in, it will have difficulty producing cash and may have trouble meeting obligations when they are due.

5. The organization’s credit profile

The organization’s credit profile affects working capital management because it relates to its ability to borrow money. If a firm has a good credit rating, it can borrow money quickly and access more funds from lenders, increasing its available working capital. However, if the firm’s credit is poor, it will not be able to secure loans at all and may have trouble meeting its financial obligations.

What is Working Capital Management?

6. The firm’s business strategy

The firm’s business strategy affects working capital management because it determines the need for longer-term credit. If, for example, the goal of a business is to settle down in the market, then it would seek long-term financing rather than short-term. It will then ensure that the working capital they have is there to be used on longer-term projects and operations rather than getting access to funds before having extra funds coming in.

7. The direction of the economy

It affects working capital management because it determines the industry activity level in an economy. The amount of cash a firm has to use in different areas of its business will change as the firm’s ability to secure short-term finance will change as the economy changes. Equally, a firm’s cash position will change as its ability to secure funds from lenders changes.

8. The overall financial strategy

The overall financial strategy that a firm adheres to effects working capital management because it determines the amount of funding the firm will need for each project and operation. For example, if a firm does not want to secure long-term financing and plans to rely on short-term funding instead, it will affect its working capital management system. The cash flow proceeds that the firm gets in each cycle may also be different to maintain its short-term financing.

9. The level of debt

It affects working capital management because it determines the amount of funding the firm must pay off in each cycle. For example, if an organization’s short-term financing is low, it will need to use more funds to make payments on its debt, such as interest and premium payments. It will directly affect its working capital management as it will need to clear more money away from cash flow.

Final Verdict

Working capital management is one of the essential functions in any organization. Taking a long-term and short-term approach to managing working capital is necessary. A firm should make sure that it has adequate working capital to meet its obligations and that it has sufficient reserves in case of an emergency.

FJF Garden’s Life Lessons

No, it’s not a blog about gardening, but FJF Garden does offer some lessons for your life in the form of feature articles and posts that might be useful in everyday matters. And, trust me when I tell you that what was an “everyday matter” 40 years ago is peanuts compared to what we are looking at today (due to the increased complexities of the world and the instantaneous nature of news hitting the airwaves these days).

Whether we are talking about finance and your personal credit score, why you may have been turned down for a loan you felt you really deserved (spoiler alert: It’s complicated. Turns out banks look at things in more complicated ways than we might have thought.), or even why you should be watching what you eat, or why you should exercise more – and any other topic – we want to be a resource for you.

While the world may feel like it’s spinning faster than ever before (it’s not, really), remember the many good things that are now available to you to research versus 40 years ago (when you’d have to haul yourself over to the library to hopefully find a book that contains the info you’re looking for).

We’ve got some good stuff coming your way! So stay with us!