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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.
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.