All You Need To Know About Bankruptcy Law
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When a public company considers the option of filing for
bankruptcy, the decision affects everyone who has a stake in it - its
employees, its creditors, and its bondholders. In case such an eventuality
occurs, bondholders need to understand what would happen to their investments.
A few typical questions, with their answers, follow:
Ques. What exactly is bankruptcy law?
Ans. Putting it very simply, bankruptcy law is a condition when a company
becomes unable to pay off its debts, in time when they become due. Under
the federal bankruptcy laws, public companies file for protection in
such a case when their liabilities or debts surpass the value of their
assets, or when they find it impossible to pay their bills. A bankruptcy
filing arranges for the company to reorganize its business, hoping that
it would return to profitability; or else, completely shutting down its
operations and disposing off its assets, the sale proceeds of which are
used to pay off debts – commonly called the process of liquidation,
Florida bankruptcy law.
Ques. What happens when a company files for bankruptcy?
Ans. Under either Chapter 7 or Chapter 11 of federal bankruptcy laws,
public companies are permitted to file for bankruptcy protection.
In case of filing under Chapter 7 bankruptcy law, a corporation is shut
down after federal courts decide that its re-organization would not be
worthwhile. Trustees appointed by the Court liquidate all the assets
of the company, and distribute the earnings to satisfy claims. Claims
are considered in following set ‘order of their priority’:
i) Secured creditors with claims protected by specific assets or collateral,
like real estate
ii) Unsecured creditors - like bank lenders, bondholders and suppliers
iii) The stockholders.
Under Chapter 11, only a bankruptcy court can approve all major business
decisions of a company, with the company attempting to re-organize and
operate as in the past, and its management continuing to run its everyday
operations.
A wing of Department of Justice oversees the administration of California
bankruptcy law cases. It establishes several committees to represent
the interest of
parties, including all the creditors - such as banks and bondholders,
and stockholders. The committees work in cohesion with the company to
develop a plan for its re-organization, which must receive the approval
of the creditors, and stockholders, along with being confirmed by the
bankruptcy court. Even if the plan does not get the approval of some
of the groups involved, the court can approve it, provided it believes
the plan treats creditors and stockholders justly.
Under Chapter 7 bankruptcy
law, bondholders may receive a part of the
value of their bonds. So as to receive their payments, after receiving
notification of the bankruptcy filing of a company, bondholders need
to file a claim, and they are paid if any cash is left after paying
off other expenses.
Ques. How do I know if a company has filed for bankruptcy?
Ans. It is from various news reports that investors mostly learn of
bankruptcy filings. However, it is your broker who gives you this information
from the company, if you hold bonds through a broker. You will receive
direct information from the company, if the bonds are held in your name.
In case you do not receive any information from the company, contact
your brokers or investment advisors.
The Bankruptcy Courts mostly provide a listing of the bankruptcy courts,
along with their links to their web sites. Along with providing information
on bankruptcy procedures, the official websites of Courts also provide
official bankruptcy forms, and the proof of claim form of the creditor.
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