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BANKRUPTCY is a state of insolvency of an organization or individual, i.e. an inability to pay debts. In the U.S., bankruptcy can take either of three forms:

Chapter 7 is involuntary liquidation forced by creditor(s). Some companies are so far in debt that they cant continue their business operations. They are likely to "liquidate" and are forced to file under Chapter 7. The courts take over and administers through a court appointed trustee. Their assets are sold for cash by a court appointed trustee. Administrative and legal expenses are paid first, and the remainder goes to creditors;

Chapter 11 is voluntary by the debtor. Unless the court rules otherwise, the debtor stays in control of the enterprise. The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to represent the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt.; and,

Chapter 13 bankruptcy, a debtor proposes a 3-5 year repayment plan to the creditors offering to pay off all or part of the debts from the debtors future income. The amount to be repaid is determined by several factors including the debtors disposable income. To file under this chapter you must have a "regular source of income" and have some disposable income. Like in a Chapter 7, corporations and partnerships may not file under this chapter.

Learn new Accounting Terms

PROFIT BEFORE TAXES (PBT) is a profitability measure that looks at a companys profits before the company has to pay income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax.

CONTROLLABLE MARGIN technically is the excess of contribution margin over controllable fixed costs. Managerially it is that margin that you can reasonably expect from a process that is balanced and controlled. Controllable margin is considered to be the best measure of a managers performance in efforts to control revenues and costs.

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