What Does It Mean When A Company Goes Bankrupt?

An empty wallet. (Photo: Reuters)

When you think of the word bankruptcy, it's easy to picture a failed company that's on the verge of actually dying, with shares that are all going down, and employees leaving aplenty. More often than not, the word bankruptcy leaves a bad taste in the mouth of anyone who has been in business for a while now and acts as the end-all-be-all warning for those who are just starting to fully dip their toes in the water.

This is a common misconception however, as a company going bankrupt does not always mean failure. Most companies even file for bankruptcy as a way of staying afloat. In fact, chances are, if you're a frequent player, there's a big chance that you've ridden in a bankrupt airline. That's because United, Delta, and American Airlines all filed for bankruptcy in 2002, 2005, and 2011, respectively.

What is bankruptcy?

But first, what even is bankruptcy? Or in business talk, Chapter 11 bankruptcy? Simply put, bankruptcy is a legal term for when a business (or a person) cannot repay their outstanding debts due to lack of funds, or a business plan that went haywire. Per Investopedia, the process begins with a petition filed by the debtor, or in some cases, on behalf of creditors. All of the debtor's assets are then evaluated and measured, and these assets can be used to repay a part of the outstanding debt.

Although it comes with a lot of negative connotations, bankruptcy can actually offer either an individual or a business with a fresh start, while also offering the creditors a chance to get some form of repayment through the assets that are available for liquidation. In fact, while some cases result in the sale of a company, bankruptcy actually offers a business entity to continue operating, reconfigure their debts, or get back on their feet, and this is actually the case for the three aforementioned airline companies.

Of course, not every company can survive after bankruptcy. In fact, one of the biggest determinants in whether a company should fully liquidate or attempt to restructure and reorganize is whether it still has a reason to exist. Same goes with bankruptcy in the first place, as more often than not, companies that file for bankruptcy are those that failed in their markets.

Whatever the case, bankruptcy is not always the final stroke for companies, as it is a beginning as much as it is an ending.

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