The federal bankruptcy laws are implemented to decide the fate of a corporation whether it will go out of business or it can be reorganized to recover from crippling debt. The bankruptcy corporation can use the chapter 7 bankruptcy code to liquidate the assets or chapter 11 to reorganize the business with the hopes that it will be able to do business again and make profits.
When a corporation has filed for chapter 7 bankruptcy, it must stop conducting all operations. The court will appoint a trustee to liquidate all the company’s assets and use the money to pay off the existing debts. In this case, the company will go completely out of business.
If the bankruptcy corporation implements chapter 11 bankruptcy, the management continues to run the daily business operations but all the significant business decisions are taken by the bankruptcy court. Public limited companies opt to file for chapter 11 bankruptcy because it allows them to run their business as well as well have some control over the bankruptcy process. The US trustee will appoint one or more committees to represent the creditors and stockholders to work with the corporation. A reorganization plan is implemented to get the company out of debt. The court will approve the plan and has to be accepted by all creditors, bond holders and stock holders.
Once the plan is implemented, the court will relieve the corporation from paying a portion of its debt so that it can make some progress. There is a committee formed to represent the unsecured creditors, including bond holders and stock holders.
Once the committee has developed the plan with the corporation, the bankruptcy court will determine whether it is complying with the bankruptcy code before implementing the plan. Businesses that are too much in trouble and have no options to exist anymore will usually file for chapter 7 bankruptcy. The trustee will sell off the assets to pay off the administrative and legal expenses first. The balance left is paid to the creditors. If there are any secured collaterals, they are returned back to the secured creditor. If there are any unsecured creditor or bond holder that are left to be paid, they will be notified of the chapter 7 filing by the corporation so that they can get back their portion of money if left. The last to be paid are the owners if the company fails.
When the corporation has filed for bankruptcy, bond holders will stop receiving any interests and principal payments. Stockholders will stop receiving any dividends. The IRS will usually go after unpaid federal taxes, and they can seize the owner’s personal assets to recover the money. The officer or the managing director of the corporation will not be personally held liable for the corporate income taxes. But if the employment taxes are due, the IRS can seize the company cars, bank accounts, or any other types of assets.
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