When a corporation faces severe financial challenges that cause its inability to repay debt obligations, filing for protection under corporate bankruptcy law is a common occurrence. Filing for bankruptcy protection allows the company to complete one of two tasks: restructure the corporation in order to become debt free and eventually profitable, or completely dissolve business operations and liquidate all the assets it owns. What happens after a decision to file bankruptcy depends on what type of bankruptcy protection a corporation is seeking.

Chapter 7 Bankruptcy

When a corporation files Chapter 7 bankruptcy protection in court, the company is required to cease all business operations as the end result is full liquidation. Corporations opt to file Chapter 7 when they determine that the continuation of the business under a reorganization is not going to result in a profitable company. Once the corporation has filed for Chapter 7, a bankruptcy trustee is appointed through the bankruptcy court. The trustee then manages the liquidation of assets to creditors, bondholders and shareholders.

In this process, the bankruptcy trustee sells all corporate assets and uses the proceeds to repay administrative and legal expenses first, followed by creditor accounts. For debt obligations that are secured by collateral, called secured debt, the trustee returns those physical assets to the appropriate creditor to fulfill the debt. If collateral is not sufficient to cover secured debt, the remaining creditors are pooled with unsecured creditors and bondholders, each of which are in line to receive proceeds from the corporation's remaining assets. Individuals who own common stock are at the bottom of the list of creditors to receive proceeds during a Chapter 7 bankruptcy. Once all assets are liquidated, the business is dissolved.

Chapter 11 Bankruptcy

Corporations that determine a reorganization of the business may result in a return to profitability opt to file Chapter 11 bankruptcy protection. Under Chapter 11, corporations are allowed to continue business operations, but the bankruptcy court retains control over significant business decisions. Corporations may also continue to trade company bonds and stocks throughout the bankruptcy process, but are required to report the filing with the SEC within 15 days.

Once Chapter 11 bankruptcy is filed, the federal court appoints one or more committees that are tasked with representing and working with creditors and shareholders of the corporation to develop a fair reorganization. The corporation, along with committee members, creates a reorganization plan that must be confirmed by the bankruptcy court and agreed upon by all creditors, bondholders and stockholders.

Within a reorganization plan, the corporation is absolved of its responsibility for a portion of its debt obligations so that the company can return to a place of profitability. Creditors are paid in similar order to Chapter 7 proceedings, starting with secured creditors and employees, followed by bondholders, preferred shareholders and stockholders. Once the reorganization plan is deemed complete by the court, the corporation emerges from Chapter 11 bankruptcy and is able to continue with operations in order to create a profit.

  1. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
  2. 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 >>
  3. What happens to a company's stocks and bonds when it declares chapter 11 bankruptcy ...

    Filing for chapter 11 bankruptcy protection simply means that a company is on the verge of bankruptcy, but believes that ... Read Answer >>
  4. 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. Financial Advisor

    An Overview Of Corporate Bankruptcy

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

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  3. Taxes

    Bankruptcy Filing Changes That Could Affect You

    When the economy is down, more people file for bankruptcy. Make sure you know about the changes that have been made to this process.
  4. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  5. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  6. Taxes

    Changing The Face Of Bankruptcy

    A 2005 law attempts to unmask fraudulent debtors and still save those who are struggling. Will it affect you?
  7. Taxes

    How to Hire a Bankruptcy Lawyer

    How do you find the right bankruptcy lawyer? What you should look for to determine the right attorney for you.
  8. Small Business

    7 Bankrupt Companies That Came Back

    Bankruptcy is often the end of a company – until it isn't.
  9. Personal Finance

    Life After Bankruptcy

    Find out what you have to look forward to after filing for Chapter 7 or 13.
  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. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  4. Bankruptcy Abuse Prevention And Consumer Protection Act - BAPCPA

    Legislation enacted by President George W. Bush in 2005 that ...
  5. Chapter 13

    A U.S. bankruptcy proceeding in which the debtor undertakes a ...
  6. Chapter 15

    A chapter under the U.S. Bankruptcy Code, added to foster a cooperative ...
Hot Definitions
  1. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  2. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  4. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  5. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  6. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
Trading Center