Question

What is bankruptcy? What is the difference between liquidation and
reorganization? What is the main benefit of reorganization?

Answer 1

Bankruptcy is the name given to the legal proceeding which occurs when a firm is unable to pay off its debt, unable to pay off its debt providers  and creditors.The federal courts listen to these cases and part of the assets are sold off to repay the debtors and creditors. Usually debtors file bankruptcy proceeding.

The differences between liquidation and reorganization is as follows
In liquidation the control  of firm is no more with the promoters. The firms assets are sold off to pay the debt holders , the preferred stock holders and later the equity holders.
In reorganization the firm can negotiate with the debtors and creditors regarding the terms of repayment and can also restructure loans . In this the ownership or control lies with the promoter of the firm.

Main Benefit of reorganization
1. It helps in retaining the power with the promoter
2 It gives second chance to promoter to improve its operations without having to sell off to crditors