BANKRUPTCY

Bankruptcy

Bankruptcy

1. Petition

According to the U.S. bankruptcy code, the firm's management has the right to file under the liquidation procedure, chapter 7, or under the reorganization procedure, chapter 11. Creditors rarely file. In both procedures, all claims are stayed; that is, there are no interest or principal payments. There are only minor exceptions, for example, lease payments (Aghion, 2006).

Under chapter 7, a trustee sells all assets and shuts down the firm. The bankruptcy court appoints the trustee. Secured creditors have a right to claim a particular asset or its value. The remaining proceeds of the sale are divided according to ...