Bankruptcy happens when business is unable to pay its debts and creditors. Business can file with federal bankruptcy court for protection, usually under chapter 7 or chapter 11. In the United States bankruptcy is governed by federal law commonly referred to as the "Bankruptcy Code". Bankruptcy cases are filed in the U.S. Bankruptcy Court and federal law govern procedure in bankruptcy cases but state laws are often applied to determine how bankruptcy affect property rights and debtors. Two major types of bankruptcy are Chapter 7 and Chapter 11. Chapter 7 happens when company ceases all of its operation and goes completely out of business. A trustee is appointed to sell (liquidate) company's assets in order to pay off its debt. Debts are payed off according to absolute priority. It is rule that secured claims are paid before junior claims are paid. In that order secured creditors are paid first, then bondholders and in the end shareholders. In other words, invest...
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