Understanding corporate bankruptcy

Investors in Illinois may benefit from learning more about the principles of corporate bankruptcy as described by the Security and Exchange Commission. A company may go out of business entirely if it files for Chapter 7 bankruptcy, and investors may lose their money. People holding bonds in these companies may still be able to recover some value, depending on how the corporation's debts are prioritized and the amount of assets available for distribution.

When indebtedness prevents corporations from continuing business operation, they file Chapter 7 bankruptcy. The business then enters liquidation, meaning all of its assets are divested for cash under the supervision of a trustee appointed by federal bankruptcy court. The cash is used to pay administrative fees, legal fees and the corporation's creditors. Secured creditors are to have their collateral returned to them if it is available. Otherwise, they are to be grouped with unsecured creditors splitting the remainder of the claim.

If all the creditors are able to claim in full, stockholders may be notified if there is still a remainder left to be divided. However, in most cases this scenario would be unlikely, as stockholders are rarely notified of Chapter 7 proceedings. Businesses file Chapter 11 bankruptcy when they are simply trying to reorganize and return to running a profitable enterprise. Major executive decisions require approval from the bankruptcy court, but management is still able to run operations on a daily basis.

Businesses interested in filing Chapter 7 or Chapter 11 bankruptcy typically benefit from contacting legal counsel. Lawyers may be able to help business owners explore and evaluate the ramifications of each decision and help ensure the process is completed properly. Legal counsel may also be effective in protecting the long-term interests of the business owner.

Source: U.S. Securities and Exchange Commission, " Corporate Bankruptcy", November 07, 2014

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