Corporate Bankruptcy Laws

Corporations can file for bankruptcy under either Chapter 7 or Chapter 11. Chapter 7 is an extreme form of bankruptcy that results in the termination of the business, while Chapter 11 is a way for a struggling business to try and stay in business.

Chapter 7

Chapter 7 is liquidation bankruptcy. Basically, the corporation will sell off all of its property, use that money to pay off as many debts as possible, and then the remainder of the debts are discharged and the corporation no longer exists.

Chapter 11

Chapter 11 is a less extreme version of bankruptcy that allows a corporation to reorganize. The purpose of reorganization is to buy the corporation some time to pay off its debts while staying in business.

Bankruptcy Plan

Under Chapter 11, the corporation will prepare and file a reorganization plan which outlines how the corporation with survive and pay off its debts. The plan is effective as soon as the judge approves it.

Voluntary Bankruptcy

Sometimes a corporation has no financial option except to declare bankruptcy. In that case, the corporation files for bankruptcy by filing either a Chapter 7 or 11 petition for bankruptcy.

Involuntary Bankruptcy

Certain creditors have the legal right to force a corporation to bankruptcy. If the creditor satisfies the complex legal requirements to do so, the creditor can file a petition for bankruptcy on behalf of the corporation.

References

• U.S. Bankruptcy Court website