Corporate Bankruptcy

In addition to laws and rules governing bankruptcy by individual citizens, Congress has created a number of chapters of bankruptcy that govern how corporations and other business entities file for bankruptcy and the consequences of those actions. The corporate world is allowed to use chapters 7 (liquidation) and 11 bankruptcy to get out from under crippling debts.

When a company opts for chapter 7 liquidation bankruptcy, the assets of the company are auctioned off or sold to supply money to the company. This money is then used to pay off the company’s creditors and investors. In dishing out the proceeds from the sales, the investors that took the least amount of risk are paid off first. A secured creditor takes less risk than an unsecured creditor because the credit, or money, invested in the company is backed by some sort of collateral, like a mortgage or some other asset of the company.

Individuals who hold bonds in the company have a much greater chance of recovering losses than do stockholders. Bonds represent a debt of the company and the company has agreed to pay bondholders interest and to return the principal they invested. Stockholders, while they own a piece of the company, take the greatest risk.

A company’s securities, like stock and whatnot, can be traded when a company is in chapter 11. They likely won’t meet the listing standards of Nasdaq or the New York Stock Exchange but there is nothing that says they can’t be traded on the OTCBB or the Pink Sheets.

Chapter 11 works in much the same was as it does for consumers.

Contact a Boston Bankruptcy Lawyer

For more information on all forms of bankruptcy, contact the Boston bankruptcy lawyers of Joshua Spirn & Associates at 1-800-975-5346.