Essay 1 - Neha Shah 10/03/2011 Business Law II Question 1...

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Neha Shah 10/03/2011 Business Law II Question 1 Professor Rodriguez Bankruptcy is a legal procedure for liquidating a business (or a property owned by an individual) which cannot fully pay its debts out of its current assets. Bankruptcy can be brought upon itself by an insolvent debtor (called “voluntary bankruptcy”) or it can be forced on court orders issued on creditors’ petition (called “involuntary bankruptcy”). Two major objectives of a bankruptcy are (1) fair settlement of the legal claims of the creditors through an equitable distribution of debtor’s assets, and (2) to provide the debtor an opportunity for fresh start. Bankruptcy amounts to a business-failure, but voluntary winding up does not. Chapter 7 is a section of the US Bankruptcy code under which a company or an individual can declare bankruptcy. A Chapter 7 bankruptcy is also known as a liquidation bankruptcy. Once Chapter 7 has been filed, the US Bankruptcy Court appoints a trustee. With a Chapter 7 bankruptcy, the trustee takes an inventory of all non-exempt assets and liquidates them. The profits are then used to repay eligible creditors of the Chapter 7 bankrupt party. Chapter 7 creditors are ranked according to the credit risk they took—the lower the risk, the higher the likelihood of being repaid. In accordance with the absolute priority rule, under a
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Essay 1 - Neha Shah 10/03/2011 Business Law II Question 1...

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