Bankruptcy

Bankruptcy is a legal process a company enters when it can no longer meet its financial obligations, giving it court protection from creditors while it either reorganises its debts or liquidates its assets entirely.

In a reorganisation, often called Chapter 11 in the United States, the company keeps operating while a court oversees a plan to restructure or reduce what it owes. Existing shareholders are frequently wiped out or left with a small fraction of their original stake, since creditors and lenders have first claim on whatever value remains. In a liquidation, the company's assets are sold off entirely and the proceeds distributed to creditors in order of legal priority, with shareholders standing last in line and often receiving nothing at all.

Bankruptcy is usually the endpoint of a longer decline, mounting debt the business can no longer service, covenants breached, cash running out, rather than a sudden event, which is why watching a company's leverage and cash generation over time matters well before any bankruptcy filing becomes a real possibility.