Running Head: BANKRUPTCY 1
Milestone 1: Bankruptcy
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Incorporation
A diverse range of complex issues may arise for clients when they start a new business in the
form of a corporation. It is instrumental to take into account the accounting aspects of the new
entity along with the necessary ethical considerations. Some of the key areas that clients try to
focus on include:
• In case challenging situations arise for the business and it has no other choice but to file
for bankruptcy and the ethical dimensions that arise while deciding whether it must file
for bankruptcy or not.
• The chief aspects that have to be taken into account when a business entity faces a
challenging time and is forced by creditors to file for bankruptcy and the defense options
that are available to the business. f
• The amount of money that might be paid in case the business entity gets liquidated. f
Voluntary Bankruptcy
Voluntary bankruptcy refers to the type of bankruptcy in which the proceedings are
commenced by the debtor. The bankruptcy is instituted by an adjudication upon the petition of a
debtor of a business (Legal Information Institute, n.d.). Two types of bankruptcy have been
identified in Chapter 7 and Chapter 11. As per Chapter 7 bankruptcy, a company terminates its
commercial activities and processes and starts to liquidate its assets. According to Chapter 11
bankruptcy, a business entity is allowed to reorganize and carry on with its business operations.
A diverse range of ethical implications come into the picture when a company goes
bankrupt or files for bankruptcy. Some of the major ethical aspects include the impact of
termination of business operations on the organizational personnel, the plan to make payment to
unsecured creditors of the business, and whether filing for bankruptcy is reasonable and
justified or not. The type of bankruptcy that takes place can influence the ethical consequences
that arise from it. For example, in the case of Chapter 11 bankruptcy, a company is able to
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continue with its operations, and as a result, it does not have to consider the effect on employees
since they can earn wages. For repaying the unsecured creditors of the business, it is imperative
to have in place a repayment plan, or the company can focus on selling its assets so that it can
have funds to pay back the creditors. As per Chapter 7 bankruptcy, a business entity has to make
payments to its creditors in order of priority. Before making payments to unsecured creditors,
the company has to pay its employees to which it owes wages.
Forced Bankruptcy
Forced bankruptcy is also known as involuntary bankruptcy. The creditors of a business
may force it to file for bankruptcy by making a complaint in the court of law (Hynes & Walt,
2019). Before such a bankruptcy takes place, it is instrumental to ensure that the necessary
requirements are fulfilled. As per U.S. Code § 303, a company must have at least 12 creditors,
and out of them, three need to take part in the involuntary petition (Legal Information Institute,
n.d.). A defense that can be used by a business is that it pays the creditors the debts when they
become due. It may also use another defense stating that the amount that is being claimed by the
creditors is inaccurate. In case the specific petition that has been filed is not controverted in a
timely manner, the court has the authority shall order relief against the involved debtor, in the
case of an involuntary bankruptcy case, under the specific chapter under which the petition has
been filed (Legal Information Institute, n.d.). f
The court has the power to reject the voluntary or forced bankruptcy petitions. In case a petition
is accepted, then an order of relief has to be introduced. Based on it, all the involved parties have
to work on a plan of action that has to be followed. Until the business entity has cleared off its
debts, the bankruptcy court will overlook it. f f f
Liquidation
Liquidation is the process in which the existence of a business entity comes to an end.
When the liquidation of a firm takes place, it stops operating, and its property and assets are
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converted into cash or equivalents to cash so that they can be distributed among the appropriate
claimants (Olujobi, 2021). When liquidation takes place, it is instrumental to determine the
liabilities so that the apportioned assets can be utilized for the purpose of clearing off the
liabilities and financial obligations. The spreadsheet that has been attached gives a glimpse of
the creditors into the amount of money that they will receive in case the business entity is
liquidated. The assets as well as the liabilities of the business have been taken into
consideration to arrive at the money that will be paid by the business on its liquidation.
Reference
Hynes, R. M., & Walt, S. D. (2019). Revitalizing involuntary bankruptcy. Iowa L. Rev., 105,
1127.
Legal Information Institute. (n.d.). Voluntary bankruptcy. Legal Information Institute.
https://www.law.cornell.edu/wex/voluntary_bankruptcy#:~:text=Voluntary%20bankr
uptcy%20is%20a%20bankruptcy,initiated%20by%20a%20debtor’s%20creditors.
Legal Information Institute. (n.d.-a). 11 U.S. Code § 303 - involuntary cases. Legal Information
Institute. https://www.law.cornell.edu/uscode/text/11/303
Olujobi, O. J. (2021). Combating insolvency and business recovery problems in the oil
industry: proposal for improvement in Nigeria's insolvency and bankruptcy legal
framework. Heliyon, 7(2).
