Corporate Bankruptcy in the United States
Reasons for company bankruptcies
There are numerous reasons why a company might initiate bankruptcy proceedings, including:
- Poor cash flow
- Insurmountable debts
- Difficult market conditions
- Lack of funding
- Negligent or criminal behavior
- “Acts of God” and unforeseen disasters
Generally speaking, organizations undertaking bankruptcy proceedings will be in financial distress or experiencing insolvency. The first four reasons listed above are common problems for businesses in a nationwide or global recession.
Types of corporate bankruptcy
According to the US Bankruptcy Code, there are two main types of corporate bankruptcy:
- Liquidation bankruptcy (chapter 7)
- Reorganization bankruptcy (chapter 11)
Chapter 7 bankruptcy
This type of bankruptcy is known as a “straight bankruptcy” and is the process of liquidating (selling off) the organization’s non-exempt assets in order to pay creditors.
Chapter 11 bankruptcy
This chapter provides an alternative solution to liquidation for insolvent companies. A chapter 11 bankruptcy allows the organization to remain trading while continuing to pay its debts. A chapter 11 petition may be voluntary (filed by the debtor) or involuntary (filed by creditors).
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