Bankruptcy versus “bankruptcy protection”

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Bankruptcy and “bankruptcy protection” are two options open to a business that finds itself in dire financial straits. Although similar in name, the two terms differ greatly in purpose.

Bankruptcy

A business in bankruptcy has essentially reached the end of the line financially, with no hope of recovery. It faces an insurmountable wall of debt and is making a legal declaration of its inability to meet its obligations to creditors.

The purpose of bankruptcy is liquidation of the insolvent company: gather its assets, dispose of them at fair prices and distribute the proceeds among creditors in an orderly manner. Once the proceedings begin, the debtor’s ability to continue conducting business is suspended, and the appointed trustee in bankruptcy assumes complete control of all assets.

Bankruptcy Protection

The focus of bankruptcy protection (also called “insolvency protection” or “restructuring”) is usually different. Its purpose is to prevent the bankruptcy of a company where it is believed that some satisfactory compromise with its creditors is possible. This compromise might involve the company ultimately regaining its financial footing and future profitability, but not necessarily. The compromise might only involve a windup of the company, but on some basis which offers the creditors a better return that in a full-out bankruptcy.

Bankruptcy protection temporarily grants the debtor the time and protection it needs to come up with a restructuring plan and seek approval of it by creditors. During the proceedings, the indebted company can continue operating in the normal course of business while working out a solution to address its financial difficulties.

Determining the most appropriate route to follow is best undertaken with the guidance of an insolvency-focused legal advisor.

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