A:

Chapter 7 bankruptcy is sometimes also called liquidation bankruptcy. Firms experiencing this form of bankruptcy are past the stage of reorganization and must sell off any un-exempt assets to pay creditors. In chapter 7, the creditors collect their debts according to how they loaned out the money to the firm (also referred to as the "absolute priority"). A trustee is appointed, who ensures that any assets that are secured are sold and that the proceeds are paid to the specific creditors.

For example, secured debt would be loans issued by banks or institutions based upon the value of a specific asset. Whatever assets and residual cash remain after all secured creditors are paid are pooled together to be paid to any outstanding creditors with unsecured loans: e.g. bondholders and preferred shareholders.

Chapter 11 bankruptcy can also be called rehabilitation bankruptcy. It's much more involved than chapter 7 as it allows the firm the opportunity to reorganize its debt and to try to re-emerge as a healthy organization. What this means is that the firm will contact its creditors in an attempt to change the terms on loans such as the interest rate and dollar value of payments. Like its cousin, chapter 11 requires that a trustee be appointed; however, rather than selling off all assets to pay back creditors, the trustee supervises the assets of the debtor and allows business to continue. It's important to note that debt is not absolved in chapter 11: the restructuring only changes the terms of the debt, and the firm must continue to pay it back through future earnings.

If a company is successful in chapter 11, it will typically be expected to continue operating in an efficient manner with its newly structured debt. If it is not successful, then it will file for chapter 7 and liquidate. In both instances, common shareholders will most likely see little (if any) return on their investments.

To learn more about bankruptcy, check out the articles An Overview Of Corporate Bankruptcy and Z Marks The End.

RELATED FAQS
  1. What happens when a corporation declares bankruptcy?

    Understand what options are available to corporations under bankruptcy protection, and learn what takes place after bankruptcy ... Read Answer >>
  2. What are the differences between Chapter 7 and Chapter 13 bankruptcy?

    Read about some of the primary differences between a Chapter 7 and Chapter 13 bankruptcy, including who may be ineligible ... Read Answer >>
  3. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
  4. Does a shareholder lose all of their equity once a Chapter 11 bankruptcy is filed ...

    When a company files for Chapter 11 bankruptcy, the management of the company is still in charge of the daily operations. ... Read Answer >>
  5. What happens to the shares of a company that has been liquidated?

    Learn what happens to a company's shares during Chapter 11 and Chapter 7 bankruptcy proceedings, and understand how much ... Read Answer >>
  6. Under what circumstances might a company decide to liquidate?

    Learn about the circumstances under which a company may decide to liquidate, and understand how assets are liquidated in ... Read Answer >>
Related Articles
  1. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  2. Credit & Loans

    File Chapter 7 Bankruptcy

    Chapter 7 is the "liquidation" form of bankruptcy. When people file for Chapter 7, the trustee may sell some of the filer's assets to pay creditors.
  3. Entrepreneurship

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
  4. Professionals

    Consumer Protection Laws

    Consumer Protection Laws
  5. Credit & Loans

    Your Guide To Chapter 7 Bankruptcy

    Filing for Chapter 7 bankruptcy triggers an automatic stay that forbids businesses from collecting on your debt, or suing you.
  6. Professionals

    Chapter Five

    In this chapter we look at bonds and interest rates.
  7. Professionals

    Chapter 11 - 15

    Auto Chapter
  8. Professionals

    Chapter 6 - 10

    Auto Chapter
  9. Professionals

    Chapter 11 - 15

    Auto Chapter
  10. Professionals

    Chapter 1 - 2

    Candidates who pass the series 26 exam will have the credentials to supervise investment company and variable contract business . All candidates must have passed either the series 6 or series ...
RELATED TERMS
  1. Chapter 10

    A type of corporate bankruptcy filing in the U.S. Chapter 10 ...
  2. Chapter 7

    A bankruptcy proceeding in which a company stops all operations ...
  3. Wage Earner Plan (Chapter 13 Bankruptcy)

    Also known as a Chapter 13 bankruptcy, this enables individuals ...
  4. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  5. Chapter 15

    A chapter under the U.S. Bankruptcy Code, added to foster a cooperative ...
  6. Chapter 13

    A U.S. bankruptcy proceeding in which the debtor undertakes a ...

You May Also Like

Trading Center