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Why do hotels file for bankruptcy?

If you’re starting a hotel from the ground up, then there are a lot of considerations when purchasing land, hiring contractors, working alongside business consultants, etc. While there are a lot of physical decisions to make, there may be a lot more legal discussions that need to be had, such as business licensing and permits. When it’s all said and done, there’s still the matter of interior decoration and maintenance – in other words, you’ll have to hire staff.

It’s not a hidden fact that running a hospitality business takes a lot out of a person. Not only does maintaining a hotel require a lot of time, commitment and responsibility but someone has to be there to financially support the operations. That’s why many banks and lenders are willing to help people grow their hospitality business with loans – many of which can cost several million.

It’s only expected that, once a hotel is open, tourists will pile in numbers, easily repaying all the debt built up during the formation of the establishment. However, too frequently, hospitality businesses have to file for bankruptcy.

Why is that? Here’s what you should know:

A failing economy

Starting a hotel from the ground up can get exceedingly expensive, especially when the economy fluctuates so often. Many expenses can suddenly skyrocket before things are in order. When this happens, it can be difficult to recoup the money spent when expenses exceed financial obligations.

A hotel’s income is also a big factor when figuring out if a business will float or sink. In recent years, tourism has plummeted and, only recently, businesses have been seeing the rise in tourism again – but, for some hotels, they’re seeing this change way too late. Hospitality industries often have to figure out how to pay off their debt when they don’t see enough business.

The benefits of bankruptcy

When it comes to debt, creditors expect their money back and when they don’t they can take aggressive actions. The purpose of bankruptcy is to relieve a business of its financial obligations, such as outstanding debt, and settle difficulties with creditors. It’s often important, however, to know what rights a business has when filing for bankruptcy.