Business failure that occurs when the stated value of a firm’s liabilities exceeds the fair market value

of its assets.

The primary causes of business failure is mismanagement, which accounts to more than 50 percent of all cases. Next
would be economic activity, especially economic downturns (e.g. recession, rapid rise of interest rates) that can
contribute to cash flow problems and make it difficult for firms to obtain and maintain their needed financing. Last
would be corporate maturity, since like individuals, companies do not have infinite lives and go through the stages
of birth, growth, maturity, and eventual decline.

Largest U.S. Bankruptcies

Company Bankruptcy date Total assets pre-bankruptcy (in billions)

Lehman Brothers Holdings Inc. September 15, 2008 691.0
Washington Mutual September 26, 2008 327.9
Worldcom, Inc. July 21, 2002 103.9
General Motors June 1, 2009 91.0
CIT Group November 1, 2009 71.0
Enron Corp. December 2, 2001 65.5
Conseco, Inc. December 17, 2002 61.0
Chrysler April 30, 2009 39.0
The governing bankruptcy legislation in the United States today is the Bankruptcy Reform Act of 1978, which
contains eight odd-numbered chapters (1 through 15) and one even-numbered chapter (12). The two key ones in
this context would be Chapters 7 and 11.

Chapter 7 details the procedures to be followed when liquidating a failed firm. It typically comes into play once it
has been determined that a fair, equitable, and feasible basis for the reorganization of a failed firm does not exist.
A trustee is appointed to liquidate (sell) the company's assets, and the money is used to pay off debt.

Chapter 11 outlines the procedures for reorganizing a failed (or failing) firm, whether its petition is filed voluntarily
(filed by the failed firm on its own behalf for reorganizing its structure and paying its creditors) or involuntarily (it is
initiated by an outside party, usually a creditor, for the reorganization and payment of creditors of a failed firm). The
petition under Chapter 11 must be filed in a federal bankruptcy court. The company undergoing Chapter 11 expects
to return to normal business operations and sound financial health in the future. It's generally filed by corporations
that need time to restructure debt that has become unmanageable. It is the most complex and, generally, the most
expensive of all bankruptcy proceedings; therefore, undertaken only after the company has carefully analyzed and
considered all alternatives.