About Corporate Bankruptcy

There are two primary types of bankruptcy for corporations: "Chapter 7" liquidation and "Chapter 11" reorganization. The names refer to sections of the Federal Bankruptcy Code.

If a business chooses Chapter 7 bankruptcy, or is involuntarily placed in it, all the company's assets are sold, and the proceeds are used to pay creditors in a priority also defined by law. Filing Chapter 7 results in the company being dissolved.

Under Chapter 11, the company presents a reorganization plan and is not dissolved. Such a plan also may be filed by the company's creditors or other interested parties, and the company may be forced into involuntary bankruptcy under Chapter 11. The plan includes a timetable for repayment to creditors. During the reorganization time, the company is allowed to continue to operate. The amount of debt that the company is required to pay off is based on the value of the business at the time of filing, the business's ability to pay, and the willingness of creditors to accept delayed payment with the expectation that the company will return to being profitable.

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