When a company is in financial distress, one of its recourses is to turn to the federal court system for protection under the U.S bankruptcy laws. There are several chapters of the bankruptcy code. The two business reporters encounter most are Chapter 7 and Chapter 11.

A bankruptcy can be voluntary or involuntary. An involuntary proceeding is filed by creditors who seek to prevent the company from disbursing its assets before it pays its bills. Voluntary proceedings are filed by the company.

Chapter 7 leads to the outright liquidation of the company. A trustee is appointed by the court to sell the company's assets and to determine how much of the proceeds each creditor receives, as outlined by law. Secured creditors (banks, for example) are given priority over unsecured creditors (employees and shareholders, for example). When a company files under Chapter 7 it is proper to say that the firm has declared bankruptcy or has gone bankrupt.

Chapter 11 leads to a "reorganization" rather than a liquidation. A firm filing under this chapter remains a going concern, with the hope of re-emerging as a viable company. It might, however, ultimately have to convert to filing Chapter 7 and go out of business.

Under Chapter 11, a company's creditors are held at bay while the company sorts out its options. The company must propose a restructuring plan to its creditors and to the bankruptcy court. Once the plan is approved, all parties are bound by it. In recent years, some companies have turned to Chapter 11 as a strategic maneuver, especially in the face of mounting legal claims. Since the company continues in business, it is not correct to write that it has gone bankrupt.

Here are some examples of leads for stories about companies that file under Chapter 11:

• XYZ Corp. filed for protection under the nation's bankruptcy laws today.
• XYZ Corp. filed for reorganization in the federal bankruptcy court today.
• Creditors filed a bankruptcy petition against XYZ Corp. today, forcing it into reorganization proceedings.

The first two leads refer to voluntary proceedings in which the company filed the action. The third lead refers to an involuntary proceeding in which the individuals and companies to which the XYZ Corp. owes money have taken the action.

Bankruptcy filings and proceedings in bankruptcy court are open to the public and can provide a trove of information for financial and other journalists.

Here are two online resources:

www.abiworld.org
www.findlaw.com

(Pamela K. Luecke, Reynolds Professor of Business Journalism at Washington and Lee University, supplied information for this section on bankruptcy laws.)

Consequences

The fallout from bankruptcy filings can be extensive, and these consequences often make for revealing journalism. Jobs are lost, suppliers to the company are unpaid, those who have stock or bonds in the company may lose their investments.

One of the most far-reaching effects of a bankruptcy occurred when Enron Corp., the country's largest energy trader, filed a voluntary petition for Chapter 11 reorganization with the U.S. Bankruptcy Court in the Southern District of New York.

Enron was huge, the seventh largest corporation in the United States. Its collapse was so big reporters were unsure of exactly how large it was. The AP described the filing as "one of the largest corporate bankruptcies ever." The New York Times reported that Enron "filed the largest corporate bankruptcy in history yesterday." The amount involved was around $50 billion.

Coverage did not end with the Chapter 11 filing. In its aftermath, reporters learned that while corporate executives had sold much of their stock before it collapsed—going from $90 a share to less than $1 a share—Enron employees could not sell the Enron stock in their pension portfolios because of the pension law. Most of their pension fund was invested in Enron stock. In addition to losing their jobs, many were left nearly penniless. The AP reported that $850 million in pension investment had become worthless.

The fallout had political repercussions, as well. Enron, it was reported, had made large contributions to the campaigns of George W. Bush for governor of Texas and for president, and corporate executives had access to many in Bush's cabinet just before its collapse.

Questions were raised by some reporters about "cooked books." The auditing firm that had detected no problems with Enron's financing shortly before it sank stated after questions were raised about its audit that it had "destroyed" many key documents and electronic transmissions.

Reporters were busy for months after the filing. In its wake, the Department of Justice launched a criminal investigation, the Securities and Exchange Commission decided to look into the matter and five Congressional committees began investigations. Reporters checked the possibilities of mail and wire fraud and possible conspiracy.