In very simple terms, corporate bankruptcy happens when a company loses cash or is in some kind of liability. Under the United States Federal Bankruptcy Law, a company that goes bankrupt is given a chance to realign its business and try to gain profit again. The management of the business could still continue their job, but important decisions affecting the business are forwarded to and approved by a bankruptcy court. This is under Chapter 11 of the Bankruptcy Code that refers to the reorganization of a business. In Chapter 7, the company is deemed to have ceased the running of the operations and the business comes to a full stop. When this happens, a trustee is assigned to sell all the assets of the company. The money from the sale would be used to pay off the remaining debts from creditors and investors. Even when a company has already filed a bankruptcy, the trading of their stocks could continue. Those who hold bonds, as well as creditors are usually the new owners of the company. However, if the company is included in Chapter 11 bankruptcy, the reorganization will cancel the equity shares.
Companies choose to file bankruptcy because creditors would not be to take action against them. Unsecured creditors, for example, do not receive payments during the case. On the other hand, creditors who are secured, usually have protection. Examples of secured creditors are those who have control on the debtor’s property. Unsecured creditors include vendors, credit card companies, and everyone else not having security interests in any of the bankrupt company’s property. Usually, companies are qualified to file bankruptcy if any of the situations exist. A company files for bankruptcy if it has contracts that continue to contribute to operating losses. In order to legally terminate those contracts or leases, the company files for bankruptcy. If there is lack of cash and the company experiences liquidity, it also files for bankruptcy. When company losses do not abate, it has no choice but to shut down. Long term obligations or extraordinary judgments from government departments pertaining to product liabilities often result in a company filing for bankruptcy. Bankruptcy san diego and other bankruptcy lawyers help business leaders drive their companies through bankruptcy. The involvement and participation of bankruptcy lawyers are very crucial in such trying situation. Bankruptcy is no joke. It requires extensive and professional support from lawyers.
Filing for bankruptcy could either be voluntary or involuntary. When you say voluntary, a company decides to file for a bankruptcy petition. In an involuntary filing of bankruptcy, someone else files a petition that compels a company into bankruptcy.
Aside from Chapter 7 and Chapter 11, there are two more types of bankruptcy proceedings. Chapter 12 is applied to family farmers. The reorganization in this proceeding is patterned to Chapter 11. The one who owes retains the property and pays the creditor out using future income. In the last proceeding, Chapter 13, the main intention is to enforce a repayment plan, but only for individuals. This proceeding is beneficial to the debtor because it protects him from collection action. At the end of the plan, any unpaid balance of dischargeable debts is simply wiped out. This proceeding allows a debtor to regain control of his financial state.