Why Would a Company Choose to File for Bankruptcy?

Why Would a Company Choose to File for Bankruptcy?

Have you ever wondered why a corporation files for bankruptcy? The majority of companies will file under Chapter 11 rather than Chapter 7 because they can still run their business and control the bankruptcy process. Keep reading to learn more about how a Chapter 11 bankruptcy works for a company.

Chapter 11 bankruptcy is a common method for restructuring a business when it has fallen on tough financial times. This allows the company to rehabilitate its faltering business to attempt to return to profitability. Companies can continue to do business.

How Does Chapter 11 Work?

Once a corporation has filed for bankruptcy, a committee may be appointed by the U.S. Trustee, the bankruptcy arm of the Justice Department, to represent the interests of creditors. The committee may also challenge the company’s action if the company does not follow the rules.  The committee will work with the company to develop a plan of reorganization to get out of debt. Before the plan is put into action, the creditors, bondholders, and stockholders, must accept the plan. Sometimes the creditors may vote to reject the plan. The court can disregard the vote and still confirm the plan if it finds that the plan treats creditors fairly.

How Will I Know What’s Going On?

If you own stock in a company, you may be curious how you will stay up-to-date on what is going on. It is typical that you first learn about the bankruptcy in the news. Shortly after a bankruptcy is announced, you should receive a letter with information from your broker. If you don’t have a broker, you should receive information directly from the company.

It is common for stockholders to be asked to vote on the reorganization plan. Your investment may be at risk. The choice often boils down to whether some dividend in reorganization is better than no dividend in liquidation.

The above information has given you some insight into what happens when a corporation files for bankruptcy. Contact me today to schedule a consultation to learn more about the bankruptcy process, whether you are an individual or a business owner.