Reference - Federal Bankruptcy Laws
Federal bankruptcy laws are only for companies and firms that wish to
file for bankruptcy, individuals cannot go for these options. Chapter 11
and Chapter 7 are the two main categories of federal bankruptcy laws
that businesses can choose from.
Chapter 11 provides the company or firm with an opportunity to
rebuild the business in spite of crippling debts. The federal court
plays an active part in such cases, as it has to give the approval for
all the business decisions made once the case is filed. Chapter 11 is
preferred to Chapter 7 because the company will not be closed to
liquidate its assets in this instance. Also, unlike in Chapter 7, the
company does not become a security asset for lien and can still be run
as usual.
Like a trustee in Chapter 7 and Chapter 13 cases, the SEC plays an
important role in Chapter 11. The SEC has to determine if the case is
fraudulent and if the company or firm really needs to file the case
instead of just pretension for the benefit of the shareholders and
investors. If the company is involved in trading after it has filed for
bankruptcy, then the details relating to such must be registered with
the SEC.
The money will be repaid to the creditors as decided by the law.
Bondholders and investors with secured collateral are usually paid
first. Stockholders will be paid only if the company is able to stand
back on its feet and able to make some profits in spite of filing the
bankruptcy case. However, they may continue to trade with their existing
stock in the local stock market unless the company liquidates these
shares. Owners will be paid last after all the debt is returned to all
the above-mentioned people involved with the company.
During bankruptcy, the company might not be able to provide the
bondholders with principle and the stockholders with dividends, but they
might try to make up for this by providing then with new stock that they
put on the market for regaining their stand. The stockholders might not
even receive this if the company has more liabilities than assets. A
re-organization plan is prepared by a committee of creditors and
stockholders of that company and of those appointed by the trustee to
enable the company to buy more time while trying to get on to its feet.
This plan is reviewed by the SEC and then has to be approved by the
court before being put into action.
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