Question

Does the firm continue to exist in bankruptcy or does it dissolve immediately? How is the money divided between the debtors? Who gets the money first? Who gets the short-end of the stick? Are there any strategic reasons for declaring bankruptcy? Do you know of any companies that have gone bankrupt? Any other comments you have about company bankruptcy

Answer 1

Under Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors.The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.Bondholders have a greater potential for recovering their losses than stockholders, because bonds represent the debt of the company and the company has agreed to pay bondholders interest and to return their principal. Stockholders own the company, and take greater risk. They could make more money if the company does well, but they could lose money if the company does poorly. The owners are last in line to be repaid if the company fails. Bankruptcy laws determine the order of payment.

Strategic bankruptcy occurs where bankruptcy is a strategic choice rather than an unavoidable condition. Such a choice might be made to avoid or reduce heavy legal judgements, to sidestep existing contracts, or even as a tool for manipulative debt reduction. Under bankruptcy law, debts are not avoided entirely, but may be significantly reduced to the point where a business owner may consider this option profitable or at least less unprofitable. Existing contracts, collective bargaining agreements, and legal judgements are more likely to be set aside entirely as a result of bankruptcy.
Examples of companies gone bankrupt:
_General Motors was consistently considered the leading automaker in the world for 77 years, up until 2007. With mounting debt and a poor economy, the government pushed them toward Chapter 11 bankruptcy in 2009. This company, though, seems to have a success story compared to some other bankruptcy tales, though it's still too soon to see the long-term effects. GM came out of Chapter 11 reorganization (with help from government funds) with an initial public offering that was the highest in history, at $20.1 billion. Some contestants on Wheel of Fortune probably wish they could bounce back from a "Bankrupt" like that.
_Schwinn Bicycle Company
Schwinn has been the quintessential bike for kids and adults alike since the company gained overwhelming popularity in the '60s. So you'd probably be surprised to hear that the company of the perfect cruising bike has declared bankruptcy twice. By 1990, many other bicycle brands were gaining traction in the market and Schwinn began exporting production to save money. By 1993, they had declared bankruptcy. The company was bought by an investment group. In 2001, it filed for bankruptcy again, and was purchased by Pacific Cycle at auction.