Direct & Indirect Bankruptcy Costs

Direct & Indirect Bankruptcy Costs
Coming up next: Cash Dividends & Dividend Payment

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:03 Bankruptcy
  • 1:15 Direct Costs
  • 2:14 Indirect Costs
  • 3:24 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

Bankruptcy isn't cheap. Like all legal filings, it comes with certain costs. In this article, we'll examine the obvious and not-so-obvious costs of a business filing for Chapter 7 or Chapter 11 bankruptcy.

Bankruptcy

Mercy is a business woman and she is facing a big problem. She owns her own company, and it owes much more than it is worth. As a result, Mercy's company is going to have to file for bankruptcy.

Bankruptcy is a legal process by which a company or individual can get rid of debts and repay creditors. For example, Mercy's business owes a lot of money. Through a bankruptcy filing, Mercy can help her company pay off its debts.

There are two major types of bankruptcy filings. Chapter 7 involves selling off assets to pay the debts. For example, Mercy's company owns stock, furniture, and other things. Through Chapter 7, the company will have to sell everything it owns to pay the creditors.

The other major type of bankruptcy filing is Chapter 11, which allows a company to restructure itself to be able to pay off the debts. Mercy's company, for example, might close down unprofitable divisions and change the way the company is run in order to help them pay off creditors while still allowing them to stay in business.

Whichever route Mercy chooses, she will face certain costs. Take a closer look at the direct and indirect costs of bankruptcy.

Direct Costs

What are some of the direct costs associated with filing for bankruptcy? Well, Johnny is one of Mercy's creditors. His company sold Mercy supplies, and she owes him lots of money from that sale. He really needs that money. After all, he needs to pay his creditors, too!

So when Mercy's company files for bankruptcy, Johnny's company petitions the court to be listed as a creditor. He has to hire a lawyer to represent his interests, and they'll have to tell the court how much Mercy's company owes them.

All this costs money, and Johnny isn't really excited about spending even more money to get the money that Mercy owes him. Court costs are one example of a direct cost of bankruptcy. Direct costs are those that involve the actual filing of bankruptcy. This could include court costs, lawyers' fees (for both for Mercy's company and Johnny's), and administrative fees. It could also include the time that both Mercy's company and Johnny's company have to spend to get the situation resolved.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support