Federal Corporate bankruptcy laws mainly guide when companies go out of business due to varied reasons can improve their financial credibility by clearing their debt liability. In the fitness of things, the company should recover from debts and improve their business by filing case under chapter 11 corporate bankruptcy laws. Mainly it is reorganization of their business activities in order to make their business proposition profitable. Once you file a case, though management may continue to run day-to-day business activities but all new business reorganization schemes should be approved by court. If you file a case under chapter 7, under corporate bankruptcy laws, the company has to stop all business activities and declare completely out of business. In that case, the court assigns the job of liquidating all the assets to a trustee, who in turn sells off all the assets to pay off to lenders and investors.
Investors are paid first followed by secured lenders who arrange credit for the company against mortgage or other assets of the firm. In fact, they are sure to get their finances back if the company declares insolvency. If the company has floated bonds, the bondholders are sure to get their money back under such a situation as against shareholders. Shareholders are those who actually own the company and therefore are at a greater risk. The bondholders during bankruptcy will not get interest and principal payments and whereas the shareholders will no more get dividends. In case the company’s liabilities are more compared to assets the shareholders may not get anything as per court directive. Normally the Company filing case under chapter 7 of corporate bankruptcy laws is worthless and therefore the bondholders or shareholders are sure to loose their money. However if you bondholder you may receive some amount but as shareholder you have lost your money. There is always a possibility that company’s securities may continue to trade even after filing bankruptcy under chapter 11, as there is no law, which prohibits trading after filing the case.
As such on account of hassles involved in filing a case it is therefore always advisable to Avoid bankruptcy. However, to people it seems easy and most convenient way to get out of financial privations; but in fact, they cannot foresee the troubles ahead. In fact, it is not a wise solution as it leads to business bankruptcy and reckoning your business completely. Therefore, it is highly suggested to always consider other viable option before filing the case.