Unfortunately, similar to personal bankruptcies, the filings of corporate bankruptcies are also at record levels. For example, the inability of a single person to acquire bank financing results in no real estate sale, which results in no real estate closing, no real estate commissions, no title work for the settlement company, no tax revenue for municipalities, no engineering fees, no site work, no contractor work, no sub-contractor work, no purchase of tools and equipment, no purchase of supplies, no purchase of fixtures, no purchase of furnishings, etc. This downward spiral leads to the failure of businesses all along the supply chain. Each failure results in a new ripple of failures throughout the economic system. Much of the time, corporations have so many creditors and so little income that a bankruptcy under Chapter 7 is the most practical option. This type of Chapter 7 is commonly referred to as a "liquidation" and in fact, that is normally what occurs. A federal Trustee liquidates what assets can be sold and the proceeds are paid to those creditors who file claims.
Under Chapter 11 of the Bankruptcy Code, the corporate debtor (also, LLCs, Partnerships and sole
proprietorships) is referred to as a debtor-in-possession. Once the bankruptcy is filed, the
corporation prepares a Plan of Reorganization in which the corporation proposes how and how much
it intends to pay to its creditors. Many plans propose to pay substantially less than what is
actually owed to various creditors. Much depends upon the value of the assets of the corporation and
its ability to generate income in the future. Typically, these types of bankruptcies are filed because
the owners of a corporation are able to demonstrate that the corporation has the ability to continue as a
going concern. Typically, this becomes possible because either the timing of payments to creditors is extended
or the amounts paid to creditors are reduced. Finally, there are times when a bankruptcy
under Chapter 11 is filed even though, ultimately, the plan is to liquidate the business. This type
of bankruptcy is normally filed in an effort to acquire greater value for the assets of the corporation,
as a result of an orderly liquidation, than would otherwise be recovered under Chapter 7 of the
Bankruptcy Code.