An introduction to the concept of bankruptcy

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An introduction to the concept of bankruptcy


Updated: December 26, 2012

The content is accurate at the time of publication and is subject to change.

Bankruptcy has a very common word given the present Global financial situation. Many Corporate Companies are filing for Bankruptcy following a complete drying up of funds, in an attempt to keep creditors at bay. Following the worst phase of the recession, several top corporate companies in the United States, approached the courts, or were forced to do so by their creditors. These bankrupt companies were either instructed to restructure the company or sell out to the highest bidder available.

Bankruptcy is a court ordered status issued to a company following complaints filed by creditors. A company is considered bankrupt when it can locate the funds, through revenue to pay back its creditors.

Most often, Companies that are unable to meet the demands o other creditors are taken to court by the creditors themselves. A company can also approach a court on its own accord to file for bankruptcy. The Court after establishing that a company is bankrupt can do one of two things: it can either disband the company or ask it to sell its shares and stocks to the highest bidder available or it can ask the company to restructure its working. The final decision taken by the court is based on the reasons it understands to be the cause of the Bankruptcy. In some cases, a poor management of funds and finance policies over time lead to a company's bankrupt state. In other cases, a complete meltdown of a company's market value overnight can lead to disaster. It was the latter that pushed several successful companies to bankruptcy during the recession.

The company has to, under any circumstances; follow the orders of the court. The creditors are then given some reprieve by the court in terms of remuneration. The company, if selling out, will sell out at a price with which it can pay back its creditors. At times the company that buys a bankrupt company may choose to retain the arrangement of share holders and creditors, if the creditors and shareholders are willing to do so.

Some companies attempt to mask the real state of their accounts from their creditors. They do so by releasing false statements of expenditure versus profit. Companies may be tempted to engage in such activity fearing a court ordered disbanding or break down of the company. This is considered bankruptcy fraud. When the creditors' suspect that a company is running hugs losses, they may decide to take the company to court. Under these circumstances a court of law will penalize the company for attempt to cheat its creditors and the legal framework of the country.

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