When a corporation is faced with overwhelming debt and cannot pay basic expenses, such as payroll and utilities, filing for bankruptcy may be the only option. There are two types of corporate bankruptcy, Chapter 7, liquidation, and Chapter 11, reorganization. In either type of bankruptcy, according to a Bankruptcy Lawyer, stockholders typically receive very little or nothing.
Chapter 7 – Liquidation
Usually, filing for Chapter 11 is more advantageous than Chapter 7. However, when a company has no hope of surviving as a viable business or has failed in a Chapter 11 reorganization, a Chapter 7 bankruptcy may be necessary. All assets will be liquidated and sold by the bankruptcy court and the proceeds used to pay off creditors in the following order:
- Secured creditors are paid first. These creditors had given loans to the company backed up by land, machinery or other assets. Bank loans are often listed with this group of creditors.
- Unsecured creditors and bondholders are paid next, such as bank lines of credit or short-term loans.
- Stockholders are paid last. Any remaining money is divided proportionally among them, but since the debts were greater than the assets, stockholders can expect to receive nothing.
Chapter 11 – Reorganization
Most companies try to reorganize under the protection of Chapter 11 when there is any possibility of emerging from the Bankruptcy Lawyer Rockford, IL as a viable company. The business will be required to develop a court-approved reorganization plan and remains in operation. Chapter 11 bankruptcy protects the business from creditors during the reorganization period.
- The federal bankruptcy court appoints a trustee to guide in the formation of a plan to settle obligations to creditors.
- All existing debts and contracts are renegotiated, including union contracts.
- Creditors and stockholders need to approve the reorganization plan, but their approval is not essential. The bankruptcy judge has the ultimate authority and can unilaterally approve the plan.
- At the end of the reorganization period, the company resumes normal operations and is no longer under the protection of the court.
- Stockholders may eventually get back some portion of their investment, but it may take years to recoup pennies on the dollar.
Crosby Law Firm is an experienced bankruptcy lawyer in Rockford, IL. He has the legal expertise you can count on throughout the complex bankruptcy process.
