(Source: Richmond Times - Dispatch)
General Motors Corp.'s filing for bankruptcy protection yesterday highlights what many companies today face: the ugly scenario of having debts that far outweigh their assets. That means they can't pay their bills or their creditors in a timely fashion. And so, in many cases, they turn to the bankruptcy court for cover - either to liquidate or to reorganize their businesses.
The plethora of corporate bankruptcies lately could put this year in the record books.
There have been 100 public- company bankruptcy filings during the first five months of this year, just shy of the 2002 high for the same January-through-May period, according to BankruptcyData.com.
Since last fall, public companies based in the Richmond area that have filed for bankruptcy include Circuit City Stores Inc., LandAmerica Financial Corp., Chesapeake Corp. and S&K Famous Brands Inc.
All four companies are winding down their Richmond-area operations after selling units or closing stores.
Given the high number of bankruptcies, it is probably a good time to understand what a corporate bankruptcy is, and how the process works.
Q: What is bankruptcy?
Bankruptcy is a legal procedure set forth by the U.S. Bankruptcy Code that is used when a debtor isn't able to make its payments.
That could happen when a company or individual can't pay debts as they come due, or has overwhelming debt obligations.
In the case of GM, the nation's largest automaker had $172.81 billion in debt and $82.29 billion in assets, according to its bankruptcy filing.
Bankruptcy is a haven because it gives companies protection from their creditors, which can no longer demand to get paid once bankruptcy is declared.
Q: What are the different kinds of bankruptcy?
The vast majority of corporate bankruptcies are filed under Chapter 7 and Chapter 11 of the Bankruptcy Code.
When a company files for Chapter 7 bankruptcy, that typically leads to a liquidation of its business. That means the company has no intention to continue to operate and plans to sell off its parts.
The proceeds from the sale are then distributed to creditors in the order of their priority.
A Chapter 11 filing usually involves the company reorganizing its business through the bankruptcy process, with the hope that it will survive.
This action shields a company from creditors' demands for payments and any lawsuits while it restructures its finances.
"Bankruptcy supplies some breathing room to companies because it stops all collection efforts," said Theodore Eisenberg, a professor of law at Cornell University.
