Corporate Bankruptcy: Types & Laws

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  • 0:03 Bankruptcy
  • 0:47 Liquidation…
  • 2:22 Reorganization Bankruptcy
  • 3:54 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

Sometimes companies have too much debt and have no way of paying all of it off. When this happens, they often consider filing for bankruptcy. In this lesson, we will learn about the different types of bankruptcy options.

Bankruptcy

While it would be great if every business that was ever created succeeded, unfortunately some fail. A big cause of companies failing is having debt that they cannot pay. But what happens when a company does not have the money to pay back their debt? This is where some companies turn to bankruptcy, which is a procedure in which the federal court helps a company get rid of or repay its debt. Generally, a fee must be paid and a petition that includes a sworn statement indicating the amount of money you owe, your income, expenses, and a list of your assets must be provided for the court to review. What happens next depends on the type of bankruptcy. Come along as we learn the options a corporation has when their finances are in trouble.

Liquidation Bankruptcy: Chapter 7

When a corporation has no intentions of operating in the future and wants to simply end the business, Chapter 7 bankruptcy is often filed. This is a liquidation bankruptcy and occurs when their assets are of little value, and the debts are so large that reorganizing the company is just not possible.

So how does Chapter 7 work? Well, the bank appoints a trustee that takes the assets the business has left and liquidates them so that the money can be dispersed to the creditors. All secured creditors are paid first. Unsecured creditors are notified of the bankruptcy and need to file a claim to receive money if there is any left after all secured creditors are paid. If any money is left over after paying all creditors, stockholders may have an opportunity to file a claim and receive money back.

Additionally:

  • Liquidation bankruptcies only include non-exempt property. This means that debtors can keep things like clothing, household items, and in some cases their vehicle and home.
  • All non-exempt property and assets must be sold during a liquidation bankruptcy in order to pay back creditors.
  • Any balance after the assets have been liquidated is forgiven and can never be collected. In other words, creditors cannot try and collect any debt that is still due, or they could face strict penalties.
  • Debtors that have had debt discharged in a liquidation bankruptcy within the past eight years cannot re-file.
  • Those that make too much money and can pay back their creditors will not be eligible for a liquidation bankruptcy.

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