Corporate bankruptcy has been a debatable issue, especially the ones that are granted to companies under chapter 7 of the bankruptcy laws. If a corporation is unable to manage their finances and they are in such a bad state that can no more afford to pay off the debts they owe to their various creditors, they may like to file for bankruptcy in order to get the debt relief. They can file either for chapter 11 or for chapter 7 bankruptcy codes. Corporate bankruptcy cases are governed by federal bankruptcy laws.
Corporate Bankruptcy Under Chapter 11 Bankruptcy Code
The chapter 11 bankruptcy code allows the companies to reorganize their business and finances so that they could put their business on a profitable path and the debts they owe to their several creditors could be paid off. In this type of corporation bankruptcy code, a trustee is appointed by the bankruptcy court that keeps an eye on the business activities of the company. If the company has to take any important business decision, the consent of the trustee is mandatory.
Corporation bankruptcy Under Chapter 7 Bankruptcy Code
As per the chapter 7 bankruptcy code, the company loses its business and they have to stop all their business activities. A trustee is appointed by the bankruptcy court in this case as well. The only difference is that the main job of the trustee now is to liquidate or sell off all the assets of the company and distribute the amount among its various creditors and investors in order to settle their debts. The amount collected by selling of the assets of the company is paid off to the investors first because of their high priority status.
After all, their risk involvement is always higher than the creditors. Another big difference between chapter 11 corporate bankruptcy and chapter 7 corporate bankruptcy is regarding the value of the stocks. If the court gives its judgment under chapter 7, the stocks lose its value and they become worthless. On the other hand, since the company has to continue with its business operations under chapter 11 corporate bankruptcy, the stocks do not lose its value and the stockholders can still trade the stock.
Which Bankruptcy Code Is Applied In Which Case?
The bankruptcy court assesses the information regarding the company and its business activities. If there is a hope that if the company is provided some time, they can regain control of their finances and put their business back on a profitable track, the court gives its judgment based on chapter 11 bankruptcy. On the other hand, if there is just no hope for the company and it is found that the company has completely lost its control over the finances, the bankruptcy court gives its judgment based on chapter 7 bankruptcy code.