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Can staffing cuts help a business on the edge of bankruptcy?

A business struggling with more obligations and liabilities than income may have to get creative in its attempts to regain control over company finances. Business bankruptcy, such as Chapter 11 proceedings to help restructure or reorganize the company, can be a valuable tool, but companies often shy away from bankruptcy before exploring every other option first.

Reducing the number of employees through terminations or layoffs will often be part of a last-ditch attempt to reduce costs and keep the company operational. Could laying off employees bring your company back from the edge of bankruptcy?

Staff reductions often do more harm than good

Slashing the number of employees you have can reduce your payroll expenses, but it can also limit productivity and reduce the company’s performance. Fewer workers on staff will mean more stress for the remaining employees. Group firings or layoffs can also make the remaining employees worry about their job stability.

Even though the company chose to retain them, possibly due to their seniority or work performance, they might start aggressively looking for another job so that they don’t experience hardship due to a layoff or termination. Workers that get let go will maintain contact with staff members and could entice them to move on to a new company.

Companies that let go of many workers may discover that they no longer have people trained in certain niches where they require professional support. Additionally, it’s also possible that workers might try to take legal action against your company if they feel their termination was wrongful or that the layoffs and firing were discriminatory.

Bankruptcy can give you the opportunity to restructure and downsize

Rather than letting go of multiple workers in quick succession because you can no longer meet payroll obligations, you may find that it is a better decision to prioritize retaining your most skilled staff members and trimming the budget elsewhere.

The automatic stay on collection activity when you file for bankruptcy combined with efforts to restructure your debt could free up enough liquid capital or credit to allow your business to continue meeting payroll obligations.

If you do need to reduce your staff, careful restructuring with an eye on avoiding discrimination claims can be part of the bankruptcy process. Before you make any decisions that could affect your company’s solvency, it’s important to consider all of your options.