Corporate Bankruptcy

By Adam Lindheim

With the crashing of the American economy more and more corporate companies are filing for bankruptcy. In the first 5 months of this year 100 public companies filed for bankruptcy, the highest number since 2002. A company or individual files for bankruptcy when they pay their bills to their creditors in a timely fashion. Their debts outweigh their assets, and in these cases they turn to bankruptcy courts for protection. The courts will either liquidate their company or reorganize their business.

Bankruptcy is a legal procedure that is used by the U.S. bankruptcy code when a debtor is not able to make payments to its creditors. Bankruptcy is used as a safety net as it gives companies protection from their creditors which can no longer demand to be paid once bankruptcy is declared. The majority of corporate bankruptcies filed are either under chapter or chapter 11 of the bankruptcy code.

A chapter 7 filing typically leads to a liquidation of its business. This implies that the company has no intention of continuing to operate and is planning to sell off all of its assets. Proceeds from the sale are distributed to creditors in the order of their priority. A chapter 11 filing usually involves company reorganizing its business through the bankruptcy process with the hope that it will survive. When a company files chapter 11 it shields them from a creditors demands for payments and from lawsuits while it restructures it finances. Contract terms between the debtor and creditor can also be rewritten under the bankruptcy codes, something that is not as easily done without a bankruptcy filing. During a chapter 11 proceedings, the debtors reorganization plan must be accepted by a majority of its creditors.

General Motors the nations largest automaker had 172.81 million dollars in debt and 82.29 billion dollars in assets, according to their recent bankruptcy filling. They are currently trying to restructure their company so they can eventually prosper once again. They hired the consulting firm AP Services LLC who charged GM 23 million dollars for 90 days of consulting work. Bankruptcy laws have allowed GM to protect itself from its creditors and try to bring back their company.

As the number of corporate companies in the U.S. that are filing for bankruptcy continues to rise and reach record numbers, investors need to be aware of where and how they invest their money. Companies need to be more ethical with their operations, and conscious of how their operations are going in order to avoid bankruptcy.

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