Corporate Bankruptcy

Corporate bankruptcy occurs when a public company files for protection under the federal bankruptcy laws, usually because they have fallen largely into debt.

With this form of bankruptcy a trustee is usually appointed to take possession of the company’s assets and make an attempt to repay creditors.

Corporate bankruptcy can occur when a company becomes unable to pay rent to a landlord or when the company’s assets are so depleted that there is no security left for creditors.

There are two forms of bankruptcy that companies typically consider when they realize that they are in serious financial trouble: Chapter 7 bankruptcy and Chapter 11 bankruptcy.

Chapter 7 corporate bankruptcy is the more serious of the two because it involves accepting total defeat.

Chapter 7 Corporate Bankruptcy:

  • The company stops all operations and goes completely out of business
  • A trustee is appointed to liquidate all of the company’s assets and the money is used to pay off the debt to creditors
  • Secured creditors are paid back first
  • Stockholders are paid back last

Unlike Chapter 7 corporate bankruptcy, Chapter 11 allows the company a chance to regroup, reorganize, pay off their debt and continue in business.

Chapter 11 Corporate Bankruptcy:

  • Management continues to run the business operations as usual, except all major business decisions must be approved by a bankruptcy court
  • reorganization period comes into play
  • during reorganization period the bankruptcy court typically orders an "automatic stay," which prevents creditors from collecting for a period of time
  • during automatic stay the company should have time to raise enough money to pay off their debts to creditors and become profitable again

Chapter 11 bankruptcy can often give a corporation the opportunity to get back on its feet and become profitable. If this isn’t possible during the reorganization period the company will be forced to liquidate in order to pay off its creditors.

Corporate bankruptcy is not to be taken lightly because the repercussions can be staggering. The bigger the company the more employees, investors and creditors will be hurt by the bankruptcy so it’s important that corporations consider all other options available before resorting to corporate bankruptcy.

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