Define the following terms: bankruptcy law, Chapter 11, Chapter 7, trustee, voluntary bankruptcy, and involuntary bankruptcy.

Define the following terms: bankruptcy law, Chapter 11, Chapter 7, trustee, voluntary bankruptcy, and involuntary bankruptcy.

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June 8, 2021
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Define the following terms: bankruptcy law, Chapter 11, Chapter 7, trustee, voluntary bankruptcy, and involuntary bankruptcy.

Answer and ExplanationSolution by a verified expert

Explanation

Bankruptcy law is a legal procedure that helps a company in financial distress to develop a plan to resolve its inability to pay debts.It helps protect the interest of both creditors and the company during the reorganization or liquidation process.
Chapter 11 is a very important section of bankruptcy law. It deals in the reorganization of the company's debt during financial distress. Filing for bankruptcy under chapter 11 helps the company delay its debt payment without any penalty, issue additional financing to make its financials strong to repay its obligations. The reorganization procedure is guided by the court and ensures fairness and feasibility of the reorganization plan.
 
Chapter 7 is a section from the bankruptcy law that comes into play when reorganization through chapter 11 is not feasible. It explains the detailed procedure to be followed while liquidating a firm.
 
After a  company files for bankruptcy protection under Chapter 11 of the Bankruptcy Law, the court may appoint a trustee to take control of the company during the reorganization process. The company does not have to appoint a trustee unless the court considers its management incompetent or suspects some fraud during reorganization under chapter 11. However, in liquidation under Chapter 7, the court necessarily appoints a trustee for the sale of assets of the company and distribution of proceeds to the creditors.
Voluntary bankruptcy: It is a situation where the firm's management files a petition for bankruptcy in the courts. The bankruptcy is filed under Chapter 11 of the Bankruptcy Law when the company is unable to pay its debt obligations.
 
Involuntary bankruptcy: It is a situation where the firm's creditors file the petition for bankruptcy in the courts. Creditors do so if they are afraid that they will not be paid unless a bankruptcy procedure takes place.

Verified Answer

Bankruptcy law: It is a legal procedure that helps a company in financial distress to resolve its inability to pay debts.
Chapter 11 is a section from the bankruptcy law that deals in reorganization in case a company files for bankruptcy from the financial management viewpoint.
 
Chapter 7 is a section from the bankruptcy law that lists the detailed procedure to be followed while liquidating the firm.
 
A trustee is a third party appointed by the court who retains the control of the company under Chapter 11 of Bankruptcy Law if the current management is deemed incompetent or a fraud is suspected by the court. A trustee is necessarily appointed during liquidation under Chapter 7.
 
Voluntary bankruptcy is a situation where the firm's management files a petition for bankruptcy in the courts under Chapter 11 of the bankruptcy law.
 
Involuntary bankruptcy is a situation where the firm's creditors file the petition for bankruptcy in the courts under Chapter 11 of the bankruptcy law.

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