A guide to assignment on the bankruptcy process, capital structure, and legal structure. explanation of how these structures affect the firm's progress through bankruptcy.
For this discussion use your resources in the Reading Assignments to research the
bankruptcy process, capital structure, and legal structure. Explain how these structures
can impact a firm’s progress through the bankruptcy process.
Bankruptcy can be defined as a legal process by which an individual or a business restructure
their outstanding debts and provide their creditors an opportunity for repayment (Tuovila, 2021).
The bankruptcy process begins when the person or the business files a petition to a federal court.
For businesses in the U.S., they might use Chapter 7 of the Bankruptcy Code to shut their
business and stop all their operation. The court will appoint a trustee to oversee the liquidation
process.
The investors who provided secured credits will be paid first followed by unsecured creditors
and finally the stakeholders. Secured creditors are those who extend credit with the security of
collateral such as mortgages (SEC.gov, 2009). The stakeholders (owners) will be the last to get
paid and hence carry the highest risk during bankruptcy.
Alternatively, a business can file a petition under Chapter 11 which helps business restructure
their debts and continue their operation while making smaller monthly payments to creditors. A
committee appointed by U.S. Trustee develops a workable plan to reorganize and get out of debt
(SEC.gov, 2009). The committee will reflect the creditors' and stockholders' interests and should
be confirmed by the court.
Other types of bankruptcies are presented in the Bankruptcy Code. However, the main point is to
get proper legal advice. Bankruptcy will have a long-term effect on the business and its survival.
Therefore, proper planning and dialogue between stakeholders are required. All parties should
find a way to navigate through bankruptcy and return the business to profitability.
Commonly, businesses use debts to finance their operations maximize the firm's value, and
decrease the cost of capital. However, finding the optimal capital structure which is a mix of debt
and equity is crucial for a sustainable business.
As a firm adds more debt to its capital structure it increases the risk of bankruptcy and may not
be able to fulfill its financial obligations (Tarver, 2021). Consequently, the capital structure
should be built by considering the cost of bankruptcy and balancing their debts and equity. A
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