Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Reviewed by Jeffrey Johnson
Managing Editor & Insurance Lawyer

UPDATED: Dec 15, 2020

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A company going bankrupt is not just a source of anxiety for its leaders; investors, creditors, and employees all share the same anxiety and stress. When a company can no longer pay its bills or even remain fully operational, its owners will file a Chapter 7 or Chapter 11 bankruptcy.

Filing Chapter 7 or Chapter 11

A bankrupt company (aka a debtor) might use Chapter 11 bankruptcy of the Bankruptcy Code to “reorganize” its business and try to become profitable again. Companies tend to try to file under Chapter 11 rather than Chapter 7 because it allows them to still run their businesses and control the bankruptcy process. Rather than simply turning over its assets to a trustee, a company undergoing Chapter 11 has the opportunity to restructure its financial framework and be profitable again. If it fails, all assets are liquidated and stakeholders are paid off according to absolute priority.

If a company has filed for Chapter 7 or “straight bankruptcy” it is completely insolvent. This means it stops all operations and goes completely out of business. A trustee is appointed to liquidate, or sell, the company’s assets. The money is used to cover administrative and legal fees and then to pay off the debt, which may include money owed to creditors and investors.

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What a Business Bankruptcy Means for Stakeholders

Different stakeholders have different options when a company files for bankruptcy. After a company reorganizes or liquidates, there is a hierarchy to how proceeds are distributed. Secured creditors and bondholders rank high on the list. Because secured creditors have a mortgage, collateral or other assets of the company, they will be paid first. The same goes for bondholders, who are holding the company’s debt.

Stockholders and unsecured creditors take the most risk and generally have the most difficult time recovering any money after a company files for bankruptcy. Under the laws of Chapter 7, employees of the company will receive some type of wage after the company is liquidated. In Chapter 11 reorganization, other arrangements could be made.

Click this link for more information on business bankruptcies.