Question

Many firms in the United States file for bankruptcy every year, yet they still continue operating. Why would they do this instead of completely shutting down?

Answer 1

Losses are the black thundercloud that causes businesses to flee.some ceases production or reduce output but some files a bankruptcy petition, then automatic stay takes effect. In exchange for this, the company must disclose its financial situation which includes company's assets, liabilities and business affairs by filing a written disclosure statement and a plan for reorganization with the court and this provides information about reorganization plan to creditors which must approve by them.

After this, the bankruptcy court will hold a confirmation hearing for the reorganization plan. If the court confirms the plan, either the debtor in possession or a bankruptcy trustee will run the business to generate money for the benefit of the creditors and accept or reject the plan by them.

Generally, a plan to reorganize the company will result in a higher predicted value than competing plans that call for liquidation and plans work on assumption on sales and costs and plan was to be accepted by debt holders as securities and other stock rather than debt.

If creditors voted against the plan,it might call for a competing plan like liquidation.

In liquidation, stockholders generally get nothing, and unsecured creditors typically receive only a small fraction of their claim.Therefore,stockholders and unsecured creditors might vote in favor of reorganization.