Bankruptcy In The United States

By Author: Paul Smythe
Total Articles: 10
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Bankruptcy in the United States come under the Chapter 11 and Chapter 7 with the United States Bankruptcy Court presented with the authority to declare an entity as bankrupt. It emerges when a business entity is unable to meet the amount due from them to the creditors or where the net assets are negative. Neither the amount of cash reserves with the company nor the sale of a few assets can offer respite from the burden of debt. Typically, the creditors themselves or the management of the company invoke the proceedings for bankruptcy.

The Court conduct a legal and economic feasibility on the company in question and depending on its impact on the society may make the decision to restructure or liquidate the entity. Liquidation is dealt according to the Chapter 7, whereas it is the Chapter 11 that deals with the restructuring. The debt problem faced by the bankrupt firm may be solved through the formal restructuring or informal restructuring. Informal restructuring is less expensive and may result in an informal compromise on the amount outstanding. The creditors may agree for an ‘extension' of the loan duration giving ...
... the opportunity for the company to make a comeback. These creditors may also provide consent for a ‘composition', which is a part settlement of the amount outstanding to the creditors. The bankrupt company may sometimes remain on the look out for a merger to create a favorable environment.

A formal restructuring, on the other hand, can occur when the economics state the futility of continuing it as an ongoing concern, resulting in liquidation. An attempt made by the management to seek the aid of external concerns to assist in confronting the financial crunch, can also be termed as formal restructuring. In the latter instance, a trustee is formed who will take control of the operations of the business. With money being the major issue, the funds provided by the external entities will be utilized in new profitable ventures. When bankruptcy culminates in a formal reorganization, an insolvency practitioner is appointed who is in a better position to understand and evaluate the various factors related to it. Today, the success made by General Motors after the formal restructuring based on the $57.6 billion aid from the government is a great example of a company who has escaped from the clutches of liquidation.

Bankruptcy can be fought through shutting down unprofitable divisions, concentrating on profitable ventures, cutting down jobs, bringing down the cost of operations, and a lot more. The revival of a company is possible even if it has reached bankruptcy. It was stated by Brown, D. T., James, C. M. and Mooradian, R. M. that the reinvestment of the sale proceeds of assets sold by a distressed firm reflects higher average abnormal returns than those entities trying to pay off their debt.

The author of this article has dealt with many Debt Problems. Being an Insolvency Practitioner the author writes great articles on Liquidation and insolvency.