Corporate bankruptcy is a legal process whereby the business entity declares that it is unable to meet its obligations, and is seeking protection from legal action by its creditors. In the US, there are two options for businesses under the bankruptcy act; chapter 7 and chapter 11. Any business, from a sole proprietorship to a corporation, can file under either of these two chapters.
Chapter 7 provides the guidelines for a business to cease operations and liquidate assets. The ownership of the business is signed over to the bankruptcy lawyer. The lawyer is then responsible for shutting down operations, selling off assets and dividing the proceeds between the creditors.
Chapter 11 allows the business to continue to operate while attempting to restructure under the guidance of the bankruptcy court. In this type of corporate bankruptcy, the court is able to grant full or partial relief from the company’s debts and contractual obligations. In a chapter 11 corporate bankruptcy, the company is reorganized and may emerge from bankruptcy able to continue business operations.
Corporate bankruptcy is commonly referred to as a chapter eleven. Chapter eleven refers to the chapter of law under which corporate bankruptcy is governed. A company that files bankruptcy does so in the hopes to reorganize the debts that are owed out by the company.
For a company to file a chapter 11 there are many legal forms that have to be filled out, all of the forms combined together are called a petition. These petitions are filed by the attorney representing the company. There is an endless amount of forms to file, they are dedicated to painting a clear picture of the companies finances. Each area has a district where there is a bankruptcy court this is where the petition is filed. A district may encompass many counties within a state.
When a company files bankruptcy there maybe several situations where this will negatively effect the consumer that has done business with them. For instance, warranty’s may no longer be in effect. If the company owes out rebates or refunds that may also be effected. Rebates and refunds may have to be paid out through a trustee instead of directly through the company. Typically a trustee is appointed to disburse the companies debts through bankruptcy.
Not all creditors are viewed equally in a corporate bankruptcy. Secured creditors have priority over all unsecured creditors. A secured creditor is a creditor whose debt was supported by an asset, or is considered classified as such under US law. Employees are considered the highest ranked secured creditor.
Many company’s recover nicely from a chapter 11, and go on to be successful in their business. Many company’s are not able to make it under the chapter 11 and are forced to liquidate all their assess to pay off a creditor what they can.
As with a personal bankruptcy, corporate bankruptcy should be a last resort, the absolute only way that this business can be salvaged. It will taint the business’s ability to secure financing and credit for many years to come.