Understanding Bankruptcy

Bankruptcy affects both corporations and consumers. Many companies considering bankruptcy will consult with a management corp so that they can get the best and latest information that is available. A management corp will help ease them through the transition of bankruptcy. Here is some information about corporate bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 of the corporate bankruptcy code says that all of the business operations must stop and the company must go out of business. A trustee is placed in charge of selling off all of the companies business assets. The proceeds from the sale of the companies assets is then used to pay off the creditors that are owed money.

The investors who took the least amount of risk in the company by purchasing bonds get paid first. This is because of the risk-return trade off. This means that the investors who bought corporate bonds do not see as much profit from the company, but they have the most protection against losing their money. Those who are equity holders, however, have the potential to make more money by sharing in the companies growth. These investors stand to lose the most though, and are paid last if the company files bankruptcy.

Chapter 11 Bankruptcy

Much like consumer Chapter 13 bankruptcy, the corporate Chapter 11 bankruptcy does not forgive all of the companies debts. Instead, it allows them to restructure and repay their debts over a reasonable period of time. Companies that consider filing chapter 11 bankruptcy expect to be able to resume normal operations and eventually try to get out from under it. They prefer this option since they would still be in business and be able to keep their company. They simply have some debt that has gotten out of control and they need a plan to help them get back on track.

Chapter 11 bankruptcy is by far the most expensive corporate option. The reason many companies choose it is because it allows them to retain control of their business and oversee the bankruptcy process. When a company files chapter 11 they are assigned a committee to go over all of their debt and holdings. Some shareholders may be able to offer their input, but the decisions are ultimately up to the committee to make. First priority is given to the creditors, since the money in question is owed to them.

In some cases the committee cannot agree on a reasonable plan that will be given the go ahead by the courts. In these instances, business owners or shareholders may end up seeing their assets being sold to satisfy their debts anyway.

Conclusion

A chapter 7 bankruptcy means the end of the company. They are no longer in business and their investors will largely lose the money they put into the company. A chapter 11 bankruptcy allows a company that is in dire financial straits to regroup and reorganize. They are given an opportunity to repay their debts and try to become a functioning and profitable company once again. Neither bankruptcy choice is ideal, but at times it is the only option.