what-is-bankruptcy-and-does-it-always-indicate-farewell

What is bankruptcy and does it always indicate farewell?

What is bankruptcy and does it always indicated farewell?

Understanding bankruptcy

Since the beginning of 2020, covid-19 has been going on a killing spree. Hundreds and thousands of businesses have died out, and many are still on their way to fall flat on their faces.

Today’s CEOs are navigating through troubled waters, trying to find solutions to company problems in order to stay afloat. Despite the efforts put in, many companies still go out of business and this happens when all of the assets are seized or liquidated to pay for the liabilities. The company assets and liabilities are listed on its monthly or yearly balance sheets. This shows the financial health of the company and its performance over time. Investors also look at the statements to make investment decisions and estimate growth.

Now suppose that a company has more liabilities than assets. That means that the company is in loss, and may go out of business soon. To prevent this from happening, most down spiraling companies file for bankruptcy protection. But does bankruptcy really help businesses recover? Unfortunately, there is only a 10% chance that the company in question will be up and running again. Although the chances are very low, there is al least a 10% chance of recovery.

Now without any further explanation, let’s move to the two broadest types of bankruptcy filings:

Chapter 11 bankruptcy:

This form of bankruptcy provides around four to eighteen months for proper financial planning and restructuring of the business. Unfortunately, it comes with a hefty price tag of $50,000. So, this is going to be a huge expense for your company. Another thing you have to worry about is the messy paperwork involved. If you have no experienced attorney or law professional to speak of, it is clear that your business is already bust!

This form of bankruptcy protection especially helps airline companies, as they have planes as their most valuable assets. These planes are better when put to use, as they can generate fortunes for the company. Whether or not to prioritize reorganization over liquidation, is decided in court. Here, the company is typically referred to as the debtor and the ones against the debtors are called creditors.  Most creditors need their money back for personal or professional reasons, and therefore fight for liquidizing assets. If the debtor wins in court, the creditors will not be able to recover their credit.

Just as the first waves of covid-19 hit, JCPenney filed for bankruptcy. The retail store titan had to close down a large number of stores and halt debt collection. usatoday.com explains the situation better, by saying:

The retailer filed for Chapter 11 bankruptcy in mid-May with 846 stores and 85,000 employees at the time of the filing. J.C. Penney has said it hopes to emerge from bankruptcy with about 600 stores and has begun liquidation sales at around 150 stores.”

They also go on to mention the challenges faced by the company:

Before the COVID-19 pandemic, J.C. Penney was already dealing with declining sales amid digital competition, sizable debt and falling foot traffic to shopping malls. The pandemic forced the retailer to temporarily close all of its locations, cratering sales and triggering the bankruptcy filing in May.”

Well, this article has aged, and yes, the company did recover from chapter 11 bankruptcy. At the moment, Simon Property Group and Brookfield Asset Management Inc are the owners of the stores.

Chapter 7 Bankruptcy

Imagine if your company fails to seek growth, i.e., doesn’t generate enough revenue to pay the creditors before the time given. Then what would you do? The firms stuck in this exact situation, file for chapter 7 bankruptcy.

Surprisingly, filing for chapter 7 bankruptcy is relatively cheaper. If you were to file for one right now, it would cost you around $3000-$4000 dollars. The reason for it being cheaper is because there is relatively less work involved. The only actions that need to be done involve the liquidation of assets, in order to pay for liabilities and prioritizing creditors and stakeholders. And of course, all of the liabilities would not be paid for; this is the reason why the company is going bankrupt in the first place. So, the liquidated assets will be sold off to the members that have secured assets under the company. What this means is that these creditors have directly traded in property, or given a mortgage for the company’s offices. Next in line are the employees, who are yet to receive their paychecks. Pensions are also a major problem that companies have to assess. The reason being, in the US, corporations take care of their employees’ retirement.

At this point, it seems that everything is sorted out. I don’t know about you, but I have a feeling that I’m missing something.

Ah yes! The credit card companies and shareholders. They are the big losers here, and that’s how the game works. If the company does well, the investors are satisfied, however, if the company falls flat on its face, the investors will lose their money.

Conclusion

Although it seems impossible, recovery is possible and many have done. Even some, which completely failed, still have a few stores scattered across the globe.

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FAQ

Which form of bankruptcy is cheaper and why?

Surprisingly, filing for chapter 7 bankruptcy is relatively cheaper. If you were to file for one right now, it would cost you around $3000-$4000 dollars. The reason for it being cheaper is because there is relatively less work involved. The only actions that need to be done involve the liquidation of assets, in order to pay for liabilities and prioritizing creditors and stakeholders.

Why do companies file for bankruptcy protection?

When a company has more liabilities than assets it means that it may go out of business soon. To prevent this from happening, most down spiraling companies file for bankruptcy protection. It allows them to halt creditors from taking their credit back and gives the company time to restructure and earn some revenue in order to stay afloat.

List the stakeholders that get liquid cash during a chapter 7 bankruptcy.

First, the liquidated assets will be sold off to the members that have secured assets under the company. What this means is that these creditors have directly traded in property, or given a mortgage for the company’s offices. Next in line are the employees, who are yet to receive their paychecks

 

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