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6/27/17 at 10:34 AM 0 Comments

How Bankruptcy Laws Provide a New Lease on Life to Corporations

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The Bankruptcy Law is a federal statute that allows individuals, couples, and businesses to either eliminate or reorganize their debts. In other words, the bankruptcy law helps people who cannot meet their financial obligations by liquidating assets to pay their debts or by creating a repayment plan. A bankruptcy case typically begins when a debtor (individual or corporation) files a petition with the bankruptcy court under Chapter 7, Chapter 11 or Chapter 13 bankruptcy, depending upon their situation.

For many bankruptcy is a dreary subject matter, while for others, it is a means of alleviating their financial difficulties by achieving a sense of salvation. Of late, bankruptcy has gained a lot of attention in highly industrialized societies, particularly the modern American life. The roots of bankruptcy can be traced back to medieval and ancient world, but in the United States, the framing of bankruptcy law was modeled on the English Law. Since that moment, however, the United States bankruptcy law has so far taken many twists and turns.


In 1994, the US Congress passed the Bankruptcy Reform Act of 1994, which was significant in two counts. First, it amended the then current bankruptcy law in multiple areas. Second, it made way for the creation of National Bankruptcy Review Commission with an aim to study the bankruptcy law for the next two years and recommend further changes.

In the United States or anywhere else, bankruptcy filings are being made fraudulently for the sole purpose of delaying and avoiding of income taxes. There are instances when people involved in such activities have been arrested. In situations like these, bail bond companies come to the rescue of such individuals.
In general, there are two basic types of bankruptcy:

Liquidation Bankruptcy:  According to this law, debtors are required to surrender their property, which is then sold, and the returns achieved by this proceeding are distributed to the creditors. While in return, all the debts are permanently discharged.

Reorganization Bankruptcy:  In this type of bankruptcy, although debtors are allowed to keep their property, but they must also agree to incorporate an installment plan in order to repay creditors a portion of amount they owe.

Based on their applicability and concerned areas of law, bankruptcy is categorized into six different chapters:

Chapter 7: Eliminates most of the debts, but also allows liquidation for repayment
Chapter 9: Applicable to municipalities
Chapter 11: Often used by debt-ridden businesses as a way to keep venture alive
Chapter 12: Applicable to financially troubled farmers and fishermen
Chapter 13: Allows financially troubled people to keep their property and pay debts
Chapter 15: It addresses international bankruptcy issues

Fate Of Corporations In Bankruptcy

Bankruptcy law can sometimes be extremely invasive and many of the decisions made by a corporation at the time of bankruptcy should be closely assessed by the court or court appointed authority. It ensures that the company is not going to blow off its creditors and it is in fact trying to manage itself back to solvency. From the viewpoint of taxes, the United States Government does not tax corporations on profits earned overseas until and unless it comes home. In such a scenario, it only makes a good business sense for these corporations to take advantage such an opportunity available to them. It simply means billions or may be trillions of dollars left offshore.

That being said, in the event of bankruptcy and crippling debt, the fate of business organizations or corporations is solely determined by federal bankruptcy law. Mostly, bankrupt corporations (i.e. the debtors) prefer filing Chapter 7 bankruptcy because, as we mentioned, it discharges most of the debt. The debtor, however, must meet the criteria for filing Chapter 7 bankruptcy. Under this situation, the corporation must stop conducting all of its operations. A court-appointed authority takes the proceedings forward and liquidates the company’s assets and the money thus generated is used to pay off debt. The corporation goes out of business.

The aim of Chapter 7 bankruptcy is to provide the debtor a “new lease of life” meaning a fresh start. The complete wiping out of certain debt (barring certain un-dischargeable debts) frees the debtor from personal liability. After filing for Chapter 7, if the debtor acquires new property or earnings, it is not included in the bankruptcy estate. Moreover, Chapter 7 bankruptcy does not impose any limit on the amount of debt a filer may have. The debtor doesn’t need to repay debt in a court approved payment plan, while the discharge of debts occurs quickly.

When a corporation files for Chapter 11 bankruptcy, it typically continues operating after bankruptcy in a strengthened financial position. Even after filing for Chapter 11 bankruptcy, the company’s stocks can still be traded. Generally, corporations filing under Chapter 11 do not meet the listing standards of major stock exchanges such as Nasdaq or the New York Stock Exchange but their shares may continue to trade. Also, corporations can often stop bankruptcy from selling assets by saying that it needs to conduct business.

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