Personal and Business Bankruptcy: Chapter 7, Chapter 11, Chapter 13
In a Chapter 7 filing, the company ceases its operations and goes out of business. The bankruptcy court will appoint a trustee for the company who will liquidate its assets. Those funds are used to pay off the company's debts, including debts owed to creditors and investors.
Under a Chapter 11 bankruptcy filing, a reorganization will allow a company to continue to do business and its stocks and bonds can continue to be trade on the securities markets. The investors are paid in a specific order as determined by federal bankruptcy laws. Those who take the least risk are paid first. A secured creditor takes less risk and is paid first. A secured creditor has its credit terms backed by collateral, such as assets in the company or a mortgage.
For a Chapter 13 bankruptcy filing, a debt-laden sole proprietorship can submit a plan to the courts to pay back its debts over a few years. The bankruptcy court will determine who gets paid what and under what terms. Unsecured debts are discharged at the end of the plan term.