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What is Corporation Bankruptcy?

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  • Written By: James Doehring
  • Edited By: Lauren Fritsky
  • Last Modified Date: 12 November 2016
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Corporation bankruptcy is a legal procedure for corporations that cannot pay off their debts to creditors. In the United States, Chapter 11 bankruptcy is commonly referred to as corporation bankruptcy. This type of bankruptcy allows a corporation to remain intact and seek future profit. Chapter 7 bankruptcies, on the other hand, can be used to sell off a troubled business’s assets and bring a quick end to that business. Most countries today solve cases of bankruptcy in bankruptcy courts.

Early bankruptcy laws were enacted in Britain to help creditors recover money others owed them. These bankruptcies were generally involuntary in nature, meaning that they were filed by creditors against the wishes of debtors. They allowed creditors the right to seize a debtor’s assets and property, for example. Though involuntary bankruptcy laws still exist in modern countries, most bankruptcies are now filed by debtors on a voluntary basis.

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In the US, Chapter 7 bankruptcy is a form of bankruptcy that offers a hasty resolution to outstanding debts. It is often used for individuals in debt, but is also an option for corporation bankruptcy. In this case, assets of a corporation are sold on the market to allow creditors to immediately recover all or part of the money they’re owed. Chapter 7 bankruptcy may be the best choice for corporations that have little chance of paying off their debts. It will generally bring about the end of a corporation, though entire divisions of the company may be sold to other corporations fully intact.

Chapter 11 is a more complicated type of bankruptcy that is usually the preferred option for sizable corporations. Rather than immediately liquidating, or selling, a company’s assets, Chapter 11 bankruptcy allows for the restructuring of a corporation to allow it to succeed financially in the future. This form of corporation bankruptcy can benefit both creditors and employees of the company. Future revenues may allow the corporation to pay off more debts to creditors than they would otherwise be able to. Many employees of the corporation may be allowed to keep their jobs as well.

A large corporation bankruptcy case will be resolved in a bankruptcy court. Generally, a court will first investigate to see whether fraud was committed by the corporation in question. If so, an appointed trustee can take over operations of the company. If not, the corporation will be allowed to continue operating until a legal resolution to the case is achieved. Committees may be formed to represent the interests of stockholders or different creditor groups.

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