3 ULTIMATE CAUSES OF CORPORATE

BANKRUPTCY
Small businesses vary greatly in terms of the types of products and services they provide, but all
companies need to make sales and bring in revenue to survive.

When companies are not profitable for extended periods, owners may be forced to go into
bankruptcy to exit the market or reorganize the business.
Types of Corporate Bankruptcy
The type of bankruptcy proceedings—Chapter 7 or Chapter 11—generally provides some clue as to
whether the average investor will get back all, a portion, or none of their financial stake. But even
that will vary on a case-by-case basis.

There is also a pecking order of creditors and investors, which dictates who gets paid back first,
second, and last (if at all). In this book, we'll explain what happens when a public company files for
protection under Chapter 7 or Chapter 11.

Chapter 7
Under Chapter 7 of U.S. Bankruptcy Code, "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 debt," the U.S. Securities and Exchange Commission notes.

But not all debts are treated the same. Not surprisingly, the investors or creditors who signed up for
the least risk are paid first.

For example, investors who hold the bankrupt concern's corporate bonds have a relatively reduced
exposure to loss: They had already forgone the potential of participating in any excess profits from
the company (as they would have had they bought its stock), in return for the safety of regular,
specified interest payments on their bonds.

Stockholders, however, have the potential of reaping their share of a company's profits, as reflected
in a rising share price.

But in return for the possibility of greater returns, they take the risk that the stock might instead lose
value. As such, in the case of a Chapter 7 bankruptcy, stockholders may not be fully compensated
for the value of their shares. In light of this risk-return tradeoff, it seems fair (and logical) that
shareholders are second in line to bondholders when a bankruptcy takes place.

Secured creditors assume even less risk than bondholders. They accept very low interest rates in
exchange for the added safety of corporate assets being pledged against corporate obligations.

Therefore, when a company goes under, its secured creditors are paid back before any regular
bondholders begin to see their share of what's left. This principle is referred to as absolute priority.

Chapter 11
In a Chapter 11 bankruptcy, the company doesn't go out of business but is allowed to reorganize. A
company filing Chapter 11 hopes to return to normal business operations and sound financial health
in the future.

This type of bankruptcy is generally filed by corporations that need time to restructure debt that has
become unmanageable.
Chapter 11 allows the company a fresh start, but it must still fulfill its obligations under the
reorganization plan. A Chapter 11 reorganization is the most complex and, generally, the most
expensive of all bankruptcy proceedings. It is therefore undertaken only after a company has
carefully considered all the alternatives.

Part of Bankruptcy
If a company you've invested in files for bankruptcy, good luck getting any money back, the
pessimists say–or if you do, chances are you'll get back pennies on the dollar. But is that true? The
answer depends on a number of factors, including the type of bankruptcy and the type of investment
you hold.

Note this!
Companies can file for either Chapter 7 or Chapter 11 bankruptcy if they're unable to pay their debts.
Chapter 7 simply liquidates the company's assets, while Chapter 11 allows the business to continue
to operate under a reorganization plan.
If a company you've invested in declares bankruptcy, how much you're likely to get back will depend
on the type of bankruptcy and the kind of investment, such as stocks versus bonds.

3 ultimate causes of corporate Bankruptcy

While lack of profitability is the primary reason for most bankruptcies, many underlying factors can
inhibit a company's ability to make profit and lead to bankruptcy

Market Conditions
Poor conditions in the overall economy and the specific market in which a business operates are
common causes of bankruptcy.

The economy tends to follow a boom and bust cycle of rapid expansion followed by lulls or
recessions. During bust periods, consumer confidence and spending tend to decline, which can lead
to low revenue.

Companies involved in specific niche markets can also be susceptible to shifts in consumer
preferences. For example, a small business owner that owns a music store might be forced to close
shop if customers start buying digital downloads instead of CDs. Competition from larger companies
is another market factor that can cut into the revenue of small companies and lead to bankruptcy.

Financing
Financing is one of the primary challenges that small businesses face. Many business owners take
out loans to help finance their operations. If a business struggles, his lender may not be willing to
grant additional funding, which could lead to bankruptcy.

Even if an owner can secure more financing to keep his company afloat in the short-term, high debt
makes it more difficult for a company to be profitable because it has to pay interest on the debt.

Weak Decision Making

Lack of planning and level-heading thinking can lead to hasty decisions and business failure.

For instance, a business owner might spend time and money developing a product that she believes
in without surveying customers and studying production costs to gauge whether the product could be
profitable. Even if the product is useful, it might not be financially viable from a business standpoint.

Lack of education and experience in finance and management can increase the likelihood of poor
decisions, but no company is immune to making mistakes.

Other Causes
Bankruptcy can result from a host of other underlying problems that inhibit profitability. Some other
factors that can contribute to bankruptcy include poor business location, loss of key employees,
lawsuits raised by competitors and personal issues like illness or divorce. Unforeseen disasters and
criminal activity like floods, storms, fires, theft and fraud can also cause hardships that lead to
bankruptcy.

You can get through this through legal means by reacting out to us.