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Article:
Going Bankrupt in the World by: Sam Vaknin, Ph.D. It all starts by defaulting on an obligation: Money owed to creditors or to suppliers is not paid on time, interest payments due on bank loans or on corporate bonds issued to the public are withheld. It may be a temporary problem - or a permanent one. As time goes by, the creditors gear up and litigate in a court of law or in a court of arbitration. This is a technical or equity insolvency status. But this is not the only way that a company can be rendered insolvent. It could also run liabilities which will outweigh its assets. This is bankruptcy insolvency. True, there is a debate raging as to what is the best method to appraise the assets and the liabilities. Should these appraisals be based on market prices - or on book value? There is not one decisive answer. In most cases, there is strong reliance on the figures in the balance sheet. If the negotiations with the creditors of the company (as to how to settle the dispute arising from the company’s default) fails, the company itself can file (=ask the court) for bankruptcy in a 'voluntary bankruptcy filing'. Enter the court. It is only one player (albeit, the most important one) in this unfolding, complex drama. The court does not participate directly in the script. To say its lines - court officials are appointed. They work hand in hand with the representatives of the creditors (mostly lawyers) and with the management and the owners of the defunct company. They face a tough decision: should they liquidate the company? In other words, should they terminate its business life by (among other things) selling its assets? The proceeds of the sale of the assets is divided (as 'bankruptcy dividend') among the creditors. It makes sense to choose this route only if the (money) value generated by liquidation exceeds the (money) the company as a going concern, as a living, functioning, entity. The company can, thus, go into 'straight bankruptcy'. The secured creditors will receive the value of the property which was used to secure their debt (the 'collateral', or the 'mortgage, lien'). Sometimes, they will receive the property itself - if it not easy to liquidate (=sell) it. Once the assets of the company are sold, the first to be fully paid off will be the secured creditors. Only then will the priority creditors be paid (wholly or partially). The priority creditors include administrative debts, unpaid wages (up to a given limit per worker), uninsured pension claims, taxes, rents, etc. And only if there is any money left after all these payments, it will be proportionally doled out to the unsecured creditors. The USA had many versions of its bankruptcy laws. There was the 1938 Bankruptcy Act, which was followed by amended versions in '1978
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