What Happens When a Corporation Files for Bankruptcy?

The fate of a corporation in bankruptcy — whether it goes out of business or is reorganizing in order to recover from crippling debt — is determined by federal bankruptcy law. The bankrupt corporation

Under Chapter 7, the corporation must stop conducting all operations. A court-appointed trustee liquidates the company's assets and the money is used to pay off the debt. The company goes completely out of business.

In Chapter 11, management continues to run the daily business operations, but the bankruptcy court must approve all significant business decisions. Publicly held companies usually choose to file under Chapter 11 rather than Chapter 7 because it allows them to continue to run their business as well as maintain some control over the bankruptcy. The U.S. Trustee appoints one or more committees to represent the creditors and stockholders in working with the corporation. A reorganization plan is developed to get the company out of debt. The plan must be confirmed by the court and agreed to by the creditors, bondholders, and stockholders. The court can confirm the plan over the rejection of the creditors or stockholders if it finds that the plan treats them fairly.