Corporate bankruptcy in the US offers two options: Chapter 7, which involves liquidating assets, and Chapter 11, which allows the business to restructure under court guidance. The court can void binding contracts, and secured creditors have priority over unsecured creditors. Shares in publicly traded companies are delisted when the company files for bankruptcy.
Corporate bankruptcy is a legal process whereby the business entity declares that it is unable to meet its obligations and seeks protection from lawsuits by its creditors. In the United States, there are two options for businesses under bankruptcy law; chapter 7 and chapter 11. Any business, from a sole proprietorship to a corporation, can feature either of these two chapters.
Chapter 7 provides guidelines for a business to cease operations and liquidate assets. The ownership of the company is entrusted to the bankruptcy lawyer. The solicitor is then responsible for closing the deals, selling the assets, and dividing the proceeds among the creditors.
Chapter 11 allows the business to continue operating as it attempts to restructure under the guidance of the bankruptcy court. In this type of business 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 can emerge from bankruptcy able to continue trading.
As part of corporate bankruptcy proceedings, the court can void binding contracts, such as union agreements, real estate lease agreements, purchase and management agreements. This option is most frequently used by large corporations that are in a recurring cash deficit position and are unable to reorganize due to the expense of these binding contracts. Changes in the economic climate, low product sales or increased operating expenses can trigger a business failure.
In both Chapters 7 and 11, all court proceedings against the company are suspended to give the businesses time to reorganize and pay off their debts. In Chapter 11, debtors have the right to propose restructuring plans. If these plans are accepted by a majority of creditors and meet the court’s criteria, they will be forced upon the company.
If a plan cannot be agreed, the company enters chapter 7 or returns to normal operations. Should the company return to normal operations, creditors can resume legal actions against the company. Unless funding is obtained quickly, the enterprise usually ends up in bankruptcy.
Not all creditors are seen equally in a business bankruptcy. Secured creditors have priority over all unsecured creditors. A secured creditor is a creditor whose debt was backed by an asset or who is treated as such under US law. Employees are considered the highest ranked secured creditors.
Shares in publicly traded companies are delisted or delisted as soon as the company files for bankruptcy. News of economic troubles tends to reduce the value of these shares in advance of any actual corporate bankruptcy filings. As a result, stocks generally lost a significant amount in value during the period immediately leading up to the corporate bankruptcy filing.
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