Bankruptcy of Businesses Research Paper Example | Topics and Well Written Essays - 4750 words

Bankruptcy of Businesses - Research Paper Example In such cases, when businesses run out of cash and are unable to cope with their debts and costs, they may be declared bankrupt or may declare bankruptcy themselves (White, 2011). This is a very crucial time for a business and is a state of emergency for their debtors as they may be unable to recover most of their debts. Such situations ruin a business’s reputation, their chances of gaining future credit, and their chances at being able to survive in the market. However, bankruptcy is an ever-increasing phenomenon for most new businesses and many older businesses as well (White, 2011). There may be several reasons for a firm to go bankrupt, which include overspending, high advantage on loans, losses in business, mismanagement, and sudden economic disasters, which may completely change a business’s circumstances. Hence, when debtors provide businesses with loans they usually make a point to see whether the business is highly leveraged and how much earning potential the b usiness has before they grant the loan (White, 2011). Accordingly, when a business declares bankruptcy, several legal issues involved must be settled before a business can go into proper liquidation. The proper legal definition of bankruptcy and the legal implications that businesses must face before/ during their bankruptcy stage will be discussed in detail. The psychology of the management of businesses that are going through the stages of bankruptcy will be explained within the paper and the history of bankruptcy of businesses and the situations that prevailed will be discussed. The paper will continue to discuss the possible causes of bankruptcy, how they affect the businesses in question, and the way such situations can be prevented. The paper will conclude with an analysis of the future prospects of businesses that suffer from such circumstances and provide possible means of improving the situation (Vinten, 2002). BANKRUPTCY The legal and appropriate definition of bankruptcy i n the case of businesses or corporations is when a business is unable to repay its outstanding debts and thus files a petition in order to reduce the amount owed or remunerate its creditors by paying off a portion of their debts and putting their business into a state of liquidation (Vinten, 2002). The common proceedings for filing bankruptcy usually begin with the filing of a petition by the debtor in which the business shows its financial position and proves that it does not have enough cash nor sources of finance to repay its creditors. In this situation, the businesses assets are usually evaluated to determine their saleable value and then their assets are liquefied in order to be sold or auctioned. The money obtained from this sell-off is then given to the creditors in return for the debt that the debtor owes them as a full settlement of the debt. The amount paid to the creditor may be less than what the creditor has paid to the business initially. However, the creditor will ha ve to settle for a portion of the debt owed to them in the situation of bankruptcy as the business has officially shown that they do not have the ability to