Corporate Bankruptcy

By: EconomyWatch Content   Date: 3 December 2009

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Corporate bankruptcy is a legal procedure used when a public company files petition for insolvency in the court. Some experts call corporate bankruptcy a safe haven for the company against creditors’ actions. This happens because once a company files bankruptcy creditor(s) cannot press the debtor to repay debt amount.

Types of Corporate Bankruptcy

In most countries, corporate bankruptcy has a singular form. A company filing under bankruptcy laws goes into liquidation. The amount generated from the liquidation process is used to repay creditors.

The US law allows bankrupt companies to reorganize debt. In this system, the company files for bankruptcy along with a debt resettlement plan. This includes a financial plan to settle all debt over a period of time. Thus, the existing management continues to operate while the company gets more time to recover from financial disaster. The reorganization plan is covered under Chapter 11 of the US Bankruptcy Code.

In the US, most of the public companies file for bankruptcy under Chapter 11 due to the benefits it offers over liquidation. In the period September 2008-09, business bankruptcies surged by almost 26% from the previous year’s level, while Chapter 11 filings rose by more than 68% (source: US Courts statistics).

Both forms of bankruptcy have disadvantages as well. In the liquidation process, the company faces a tough time selling obsolete technology. However, Chapter 11 requires both the creditors and the court to accept the reorganization plan. If the plan is not approved by either party, the company automatically enters into liquidation stage.

Corporate Bankruptcy: Division of Assets

In a corporate bankruptcy, company assets are divided in the following pattern:

  • Secured creditors: A company usually owes the highest amount to secured creditors, such as banks. They are paid first.
  • Unsecured creditors: The list includes financers, suppliers, contractors and bondholders. They are paid after the secured creditors.
  • Stockholders: They are the owners of the company. According to the law, they have the last claim over the assets. Stockholders carry the maximum burden of a bankruptcy.

Once the creditors are paid in full, the corporate bankruptcy case is closed and the final decree is released. It declares the end of financial obligations in the name of the bankrupt company.


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