What is Bankruptcy? | American News


Bankruptcy is a legal procedure by which a person or a company, called the debtor, can ask the courts to be exonerated from debts that they are unable to pay. The purpose of bankruptcy is to allow the debtor a fresh financial start by relieving him of his debts.

All bankruptcy cases in the United States are handled in federal courts under the rules of the US Bankruptcy Code. There are different types of bankruptcy described in different chapters of the Bankruptcy Code, such as Chapter 7 bankruptcy for liquidation of assets to pay off debts and Chapter 11 Bankruptcywhich allows a business to create a reorganization plan to pay creditors over time without having to liquidate the business.

Bankruptcy works by giving people and businesses that cannot pay their debts a reprieve and the possibility of new start while granting creditors the possibility of obtaining at least part of the reimbursement.

The bankruptcy process normally begins with filing a petition with the bankruptcy court. This request can be filed by an individual, a couple or a company.

While the federal court handles all bankruptcies, each state has its own judicial district(s) where within-state bankruptcies are handled. Usually the bankruptcy process is handled outside of courtrooms by a trustee. Often, the only formal procedure is a meeting between the filer and the creditors at the trustee’s offices.

Personal bankruptcy is filed by individuals who cannot repay their debts. Individuals can apply Chapter 7 or Chapter 13 bankruptcy and, less commonly, chapter 11.

Under Chapter 7 bankruptcy, the individual’s non-exempt assets, or assets that cannot be shielded from creditors’ claims, are used to pay off their creditors. These assets are liquidated or sold and the proceeds returned to creditors. Thus, a person who files for bankruptcy under Chapter 7 may suffer a loss of property.

In Chapter 13 bankruptcy, the individual is able to use their regular income to create a repayment plan rather than having to liquidate personal assets to repay creditors. Chapter 13 bankruptcy, also known as a salaried plan, allows the individual to come up with a plan to repay creditors in installments over three to five years. Debtors with monthly income below their state’s median may be required to make payments only over three years, while debtors with monthly income above the state’s median may be required to make payments for five years. No debtor will have to repay more than five years.

People who do not qualify for Chapter 13 bankruptcy or who need special protections can file for Chapter 11 bankruptcy instead, which allows existing debts to be reorganized. Chapter 11 is one of the more complex forms of bankruptcy, however, and more commonly used by corporations and other commercial enterprises.

Business bankruptcy is filed by businesses that are unable to repay their debts. Businesses can file for Chapter 7 or Chapter 11 bankruptcy.

In a Chapter 7 bankruptcy, the company ceases operations and its assets are liquidated to pay off creditors. In Chapter 11 bankruptcy, called reorganization bankruptcy, the company filing for bankruptcy proposes a plan of reorganization that would allow it to repay creditors while staying in business. Creditors vote on the plan which, if it gets the required number of votes, is then upheld by the court, assuming it meets certain legal requirements.

Chapter 11 bankruptcy allows the company to retain its assets and continue to operate – hopefully in a more profitable way — while repaying previous debts. For example, a small business may file for Chapter 11 bankruptcy with a plan to raise its rates or offer different services that will help it be more profitable.

Bankruptcy aims to relieve individuals and businesses of their debts and protect them from creditors, who in turn must stop trying to collect their debts after bankruptcy is filed. Bankruptcy can help struggling individuals and businesses get a fresh financial start.

It is also important for investors to understand the bankruptcy process should a company they have invested in file for bankruptcy. Often, when a company goes bankrupt, its shares lose most or all of their value and the company will eventually be delisted from its stock exchanges. Sometimes, however, a company Stock will continue to trade because there is no federal law prohibiting investors from trading the shares of a bankrupt company. Such trade is incredibly riskyhowever, and may cause you to lose all of your investment.

When a company files for Chapter 7 bankruptcy and its assets are liquidated, the proceeds are divided among creditors and shareholders, with preference going to secured creditors over unsecured creditors. Secured bondholders are repaid first, followed by debenture holders, then owners of the company’s subordinated debt, followed by preferred shareholders, and finally common shareholders. This means that for bondholders, Chapter 7 bankruptcy means you have a chance of getting back some of your investment, while there is very little chance that common stockholders will see a return of the proceeds of the bankruptcy. sale.

However, if a business experiences a reorganization bankruptcy under Chapter 11 and is able to continue operating, investors have a better chance of recouping more of their investment, as Chapter 11 often includes a provision for reorganization. shareholder relief. This relief can include cash or shares in a new company, but more often than not there is little or no compensation.

  • New financial start. Bankruptcy gives debtors a second chance by erasing past debts so they can start over.
  • Protection against creditors. Creditors should stop trying – including calling you – to get a refund as soon as you file for bankruptcy.
  • Businesses can continue to operate. Under Chapter 11 bankruptcy, a business may be able to continue operating while paying off its debts.

  • May lose property. Your non-exempt assets can be seized by the courts and sold to pay off your creditors.
  • Affects credit score. Chapter 7 bankruptcy stays on your credit report for up to 10 years.
  • Business can be sold. In a Chapter 7 bankruptcy and sometimes a Chapter 11 bankruptcy, the business can be sold and liquidated to pay off creditors.
  • Investors lose. In most cases, investors in failing companies get back none or very little of their investment.

  • Abraham Lincoln. Prior to becoming the 16th President of the United States, Lincoln filed for bankruptcy when his business partner at their general store died, leaving the future President responsible for their business debts.
  • Donald Trump. Trump’s businesses have filed for Chapter 11 bankruptcy six times, starting with the Taj Mahal, which filed for bankruptcy a year after it opened. More recently, Trump Entertainment Resorts filed for bankruptcy in 2009.
  • Walt Disney. The Walt Disney Co. (symbol: SAY) the founder’s former company, Laugh O Gram Films Inc., filed for bankruptcy in 1923, weeks after producing “Alice in Cartoonland.”,“a film that was meant to be the pilot of a series. The film was a surprise success and was enough for Disney to reopen in Hollywood.
  • Lehman Brothers. Lehman Brothers went bankrupt amid the 2008 financial crisis, when it was worth $691.1 billion and was the country’s fourth-largest investment bank at the time.
  • General Motors Co. (GM). After surviving two World Wars and the Great Depression, GM went bankrupt in 2009, leading to a major corporate reorganization.


Individuals declare bankruptcy when they are unable to repay their debts. This can happen after losing a job, incurring major medical expenses, or simply overusing the credit.

What will happen if you declare bankruptcy depends on the type of bankruptcy you file. Under chapter 7 bankruptcy, some of your assets and property may be claimed by the courts and sold to pay off your creditors. Under Chapter 13 Bankruptcy, you will be required to follow a court-approved three- to five-year repayment plan.

When a company goes bankrupt, investors are usually the losers. Depending on the type of bankruptcy, you may recover some of your investment, but more than otherwise, everything is lost. Ordinary shareholders are the last to be reimbursed in the event of liquidation, while bondholders as creditors have a higher claim on the assets. Even if the company’s shares continue to trade on an exchange after it has been placed in protective custody, such trading is extremely risky and usually results in the loss of your entire investment.


Christina A. Kroll