Types

• Companies wishing to file for bankruptcy have two different options: Chapter 7 and Chapter 11 bankruptcy. Under Chapter 7 bankruptcy, the company goes out of business and asks the court to sell off its assets to pay debts and forgive the remaining debt. Chapter 11 is for companies that intend to remain in business but need the court to forgive some debt or lay out a new repayment schedule for paying off debt at an affordable rate. Chapter 11 bankruptcy is also known as reorganization, while Chapter 7 is known as liquidation.
  
  

Purpose

• Companies generally file for bankruptcy when they have large, outstanding debts and no way to pay them off. Filing for Chapter 7 allows owners to free themselves of a company bound for failure and move on to a new enterprise or livelihood. Chapter 11 offers relief for companies with financial hardship but still allows them to sell stock and carry on basic operations. At the end of a Chapter 11 bankruptcy case, the company will either choose to file for Chapter 7 and go out of business or use its reorganized business structure to compete and seek new opportunities for growth.
  
  

Process

• For companies that file Chapter 11 bankruptcy, the court will create a creditor's committee, which consists of representatives from lenders who stand to lose money if the company's debt is forgiven or reorganized. These lender representatives work with federal officials to reorganize the company's financial operations. During the bankruptcy period, the court must approve any major business decisions the company's leadership makes.
  
  Chapter 7 bankruptcy involves the court appointing a trustee who takes possession of the company's assets and sells them off to raise capital. The trustee then oversees the process of distributing the money to creditors based on the terms of each loan.
  
  

Time Frame

• Once a company submits a bankruptcy petition, all creditors must immediately stop their collections efforts. Between 20 and 40 days later, the court will hold the first meeting of creditors, which brings together court officials, representatives from affected lenders and representatives from the bankrupt company. This meeting begins the process of reorganization or liquidation. A Chapter 7 bankruptcy case can take as little as three months if the company has no assets. If a trustee must sell assets for the company the process can last much longer. Chapter 11 cases typically take between one and two years to resolve, and result in repayment schedules that can last as long as 30 years.
  
  

Warning

• The process of filing for either form of corporate bankruptcy is complex. Businesses usually entrust bankruptcy attorneys with providing all of the necessary paperwork, as well as analyzing the situation and deciding whether bankruptcy is the best option. Even a reorganization form of bankruptcy can cause a company's stock to plummet in value and harm the company's image. A bankruptcy attorney can provide an objective viewpoint that company leaders and owners may not be able to. Courts will only entertain valid bankruptcy petitions, so it's important to make sure a case is valid and that bankruptcy is an appropriate decision before filing.