bankruptcy

A company files for bankruptcy due to cash flow problems and an inability to pay their bills (interest or principal payments, rent, taxes, payroll, vendor invoices, etc.). Bankruptcy filing is a legal course undertaken by the company to free itself from debt obligations. Debts which are not paid to creditors in full are forgiven for the owners. The two most common types of filings under the U.S. Bankruptcy Code are Chapter 7 and Chapter 11. In a Chapter 7 filing, a trustee is appointed to oversee the liquidation of a company, with proceeds used to pay off creditors, employees, the government and ultimately shareholders. Far more common is the Chapter 11 reorganization, where the debtor is given time to reorganize its affairs while it continues as a going concern, preserving jobs and keeping productive assets in place. In the advent of a bankruptcy, the interests of bondholders and preferred stock owners are favored over those of shareholders.