What Is Corporate Bankruptcy?
The U.S. Bankruptcy Code establishes procedures by which businesses of all types, including corporations, can file for bankruptcy. The procedures associated with a corporate bankruptcy replicate to a significant degree those available to consumers. Corporate bankruptcy commences with the filing of a petition at the bankruptcy court in the state of incorporation.
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Types
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Corporations take advantage of one of two types of bankruptcies. A Chapter 7 bankruptcy discharges the debt of a corporation. The business ceases operations and wraps up its affairs during the course of a Chapter 7 bankruptcy case. A Chapter 11 bankruptcy permits a business to restructure its debt and reorganize its operations. The corporation does not stop operating. The objective is to ease the burden of the business's debt and better organize its operations, permitting it to stay in business and resume making a profit.
Considerations
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A corporation is not permitted to file a Chapter 11 bankruptcy absent a showing that it realistically can continue in business with protection from the bankruptcy court. The bankruptcy court trustee considers the corporation's assets and debts, revenue and expenses in determining whether a Chapter 7 or Chapter 11 bankruptcy is appropriate under the circumstances.
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Features
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A Chapter 11 bankruptcy includes the development of a debt restructuring plan as well as a reorganization plan for the business as a whole. In some cases the bankruptcy court trustee (or someone she appoints) takes over the day-to-day operations of the business during the bankruptcy case. A Chapter 7 bankruptcy is a bit more basic. The bankruptcy court trustee oversees the discharge of the corporation's debt. Assets are liquidated and the proceeds are used to pay off as much debt as possible before a discharge of remaining debt.
Benefits
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The benefits of a Chapter 7 bankruptcy include the actual discharge of debt itself. The discharge of debt permits the corporation to wind down its affairs and cease operations. The benefits of a Chapter 11 bankruptcy include permitting the corporation to continue operations on better footing. If necessary, a corporation in Chapter 11 is permitted to obtain new or additional financing to assist its overall operations. A creditor who extends financing to a corporation in Chapter 11 gains priority over other creditors when it comes to paying off the debt.
Expert Insight
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A corporate bankruptcy is legally and procedurally a complicated matter. The interests of a corporation are best served by retaining representation from an experienced corporate bankruptcy attorney. State and local bar associations maintain directories of attorneys in different practice areas.
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References
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