Corporation Bankruptcy Laws

Corporation bankruptcy laws are similar to personal bankruptcy regulations, but offer a major difference. Businesses can file for Chapter 7 bankruptcy, as many individuals do. But, they also may file bankruptcy under Chapter 11, which allows companies to continue operating while providing them with protection from creditors' actions. This is an important corporate life-saving ability.

History

The original U.S Bankruptcy Code was adopted back in 1800, but it was repealed and changed in 1803. In 1898 the so called "Nelson Act" defined bankruptcy until the major reform program of 1978. 2005 witnessed the most recent major revision, which affected individuals more than corporations. The major provisions of corporate bankruptcy laws and remedies has remained mostly constant for around 100 years.

Function

Corporate bankruptcy laws are designed to provide a "fresh start" for companies that have encountered financial hardship. The reasons for the economic problems, whether caused by market generated issues or internal miscalculations, are typically not a factor in determining eligibility for receiving protection. Whether a corporation files for Chapter 7 (liquidation of the company) or Chapter 11 (reorganization) protection, companies can alleviate or eliminate the major reasons for their economic problems. Chapter 11 is particularly important to a company that wants to continue operating, as this part of the bankruptcy code allows corporations to recover from the brink of disaster.

Types

Chapter 7 protection allows corporations to be liquidate its assets, cease operations, and avoid further collection or recovery actions without future legal proceedings. It is the last alternative for most companies, as they will cease to exist after the process is complete. Chapter 11 protection is the most popular choice for corporations that want to continue operating. This allows companies to "reorganize" their operations, while receiving protection from current creditors collection efforts, including legal actions.

Features

Once a corporation files for bankruptcy protection, all collection efforts from suppliers, lenders, and other creditors must cease. If the company has filed under Chapter 11, they must prepare a reorganization plan for the bankruptcy court. This action plan describes how they will operate in the future to avoid further problems and outline how they will develop the ability to repay former creditors. Even major U.S. corporations have used this ability to reorganize in the past, including corporate giants like Chrysler Corp. While some companies, that convince the bankruptcy court that they can continue successfully, fail to recover and revise their petition to move to Chapter 7 (liquidation of the company), many are able to recover from their current financial problems and enjoy future success.

Significance

Corporate bankruptcy laws and the protection they provide are major factors in U.S. and western European businesses. The protection from creditors and the ability to reorganize and improve operations are often invaluable options for corporations that are faced with financial ruin. Even commercial creditors, who eventually lose money from bankruptcy proceedings, typically admit they benefit from corporate bankruptcy laws, since they would have lost money eventually and spent a great deal to learn the foregone result. Corporate bankruptcy actually saves all parties money. Unfortunately, when national economic declines force many companies to seek bankruptcy protection, the "fallout" often trickles down to many other formerly sound companies, making them unstable or future bankruptcy candidates. The significance of corporate bankruptcy laws is not in question, even by those creditors that must take losses.

Resources

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