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Filing chapter 7 bankruptcy Some companies are so far in debt or have other problems so serious that they can't continue their business operations. They are likely to "liquidate" and file under Chapter 7. Their assets are sold for cash by a court appointed trustee. Administrative and legal expenses are paid first, and the remainder goes to creditors. Secured creditors will have their collateral returned to them. If the value of the collateral is not sufficient to repay them in full, they will be grouped with other unsecured creditors for the rest of their claim. Bondholders, and other unsecured creditors, will be notified of the Chapter 7, and should file a claim in case there's money left for them to receive a payment. Stockholders do not have to be notified of the Chapter 7 case because they generally don't receive anything in return for their investment. But, in the unlikely event that creditors are paid in full, stockholders will be notified and given an opportunity to file claims.
Filing chapter 11 bankruptcy What is Chapter 11 bankruptcy? - Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company, the "debtor," might use Chapter 11 of the Bankruptcy Code to "reorganize" its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court. Under Chapter 7 bankruptcy, the company stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors.
The investors who take the least risk are paid first. For example, secured
creditors take less risk because the credit that they extend is usually
backed by collateral, such as a mortgage or other assets of the company.
They know they will get paid first if the company declares bankruptcy.
Bondholders have a greater potential for recovering their losses than
stockholders, because bonds represent the debt of the company and the
company has agreed to pay bondholders interest and to return their
principal. Stockholders own the company, and take greater risk. They could
make more money if the company does well, but they could lose money if the
company does poorly. The owners are last in line to be repaid if the
company fails. Bankruptcy laws determine the order of payment. Filing chapter 13 bankruptcy
chapter 13 - The chapter of the Bankruptcy Code providing
for adjustment of debts of an individual with regular income. (Chapter 13
allows a debtor to keep property and pay debts over time, usually three to
five years.) Chapter 13 will severely impact your credit rating.
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