Financial Distress

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Definition of 'Financial Distress'

Financial distress is a situation in which a company is unable to meet its financial obligations. This can be caused by a number of factors, such as a decline in sales, increased costs, or a change in the economic environment. When a company is in financial distress, it may be unable to pay its debts, meet its payroll, or continue to operate.

There are a number of signs that a company may be in financial distress. These include:

* A decline in sales
* Increased costs
* A change in the economic environment
* A decrease in cash flow
* A failure to meet debt payments
* A default on a loan
* A bankruptcy filing

If a company is in financial distress, it may take steps to avoid bankruptcy, such as restructuring its debt, selling assets, or seeking new financing. If these measures are unsuccessful, the company may be forced to file for bankruptcy.

Bankruptcy is a legal process that allows a company to reorganize its debts and assets under the protection of the court. The goal of bankruptcy is to allow the company to continue operating and to pay its creditors as much as possible.

There are two types of bankruptcy: Chapter 7 and Chapter 11. Chapter 7 bankruptcy is a liquidation bankruptcy, in which the company's assets are sold and the proceeds are used to pay creditors. Chapter 11 bankruptcy is a reorganization bankruptcy, in which the company is allowed to continue operating while it develops a plan to repay its creditors.

Financial distress can have a number of negative consequences for a company. These include:

* Loss of customers
* Loss of employees
* Damage to the company's reputation
* Difficulty in obtaining financing
* Increased costs
* Potential bankruptcy

Financial distress can also have a number of negative consequences for the economy. These include:

* Loss of jobs
* Decreased investment
* Slowed economic growth
* Increased government spending

Financial distress is a serious problem that can have a significant impact on a company, its employees, and the economy. It is important for companies to be aware of the signs of financial distress and to take steps to avoid it.

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