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How Corporate Bankruptcy Works


A Borders Books customer walks by signs advertising a going-out-of-business sale at a Borders bookstore on July 22, 2011 in San Francisco. Borders filed for Chapter 11 bankruptcy in February of that year.
A Borders Books customer walks by signs advertising a going-out-of-business sale at a Borders bookstore on July 22, 2011 in San Francisco. Borders filed for Chapter 11 bankruptcy in February of that year.
Justin Sullivan/Getty Images

"Bankrupt" is one of those words that gets thrown around all the time, often by folks who might not know what it actually means. Politicians are called morally bankrupt. Detroit went bankrupt. Even French indie rockers Phoenix released an album called "Bankrupt!" in 2013. In truth, bankruptcy has a very specific legal meaning. It's an important tool for people and businesses that essentially owe more money than they have.

That's right, people or companies whose poor life, financial and/or business decisions leave them in hot water can dig out from the financial wreckage. Usually, the bankruptcy process lets them to do it without paying all of what's owed. The idea is that bankruptcy allows a debtor in over his or her head to get a fresh start – of sorts – while also ensuring that creditors get at least some of the money they deserve.

Some might say that luxury real estate mogul and talking hairpiece Donald Trump is the human embodiment of bankruptcy. What we do know is that Trump's businesses have relied heavily on the legal process over the years, even to an extent where The Donald has been accused of gaming the system. The multibillionaire has filed for corporate bankruptcy four separate times since 1991, claiming each time that his Atlantic City properties were worth less than what his companies owed on them and that business revenue and assets weren't enough to cover debts. That's helped him wipe out most of those obligations – without having to dig into his own substantial personal wealth – and start over again [source: O'Connor]. (Note: Trump reportedly isn't involved in the two AC properties that filed for Chapter 11 in 2014).

"Laws are like cobwebs, which may catch small flies, but let wasps and hornets break through," author Jonathan Swift once said. Mr. Swift: meet Mr. Trump.

Like prairie animals, farm stand produce and failed Trump properties, bankruptcies come in many shapes and sizes. For corporations, there are two main paths out of debt. The one that a company chooses determines what happens to the business after the arears are wiped away.