Reading about Rite Aid filing for bankruptcy. They have 3.3 in debt. By claiming bankruptcy they just wash their hands of it? Who eats all the debt?
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Case 1 : You are legally bound by a contract to pay some money at a certain date that has finally arrived but even if you sell everything you own you don’t have enough money. Bankruptcy by insolvency.
Case 2 : You are legally bound by a contract to pay some money at a certain date that has finally arrived but you don’t have the cash on your hands. You could sell your house but selling a house takes months and the contract said to pay *now*. Bankruptcy by illiquidity.
Seeing debt default coming, bankruptcy is declared and everything you own is sold to try to pay back all the people you owe money to. If there are leftovers, usually there isn’t, it goes to the owners (the shareholders).
For the people who lend you money, when you can’t pay debt anymore they are screwed so they are usually willing to negotiate better conditions rather than lose most of their investment.
Since bankruptcy causes a lot of disruption and headache for everyone, each country has a lot of legal procedures surrounding bankruptcy. Some of them to try to keep the company running with renegociated debt terms instead of selling everything.
In the USA, when you are company and everything is sold, it is usually a bankruptcy according to chapter 7 of title 11 of the US Code, and when there is a reorganisation to try to keep the whole thing afloat, it’s chapter 11. If it’s a private individual it’s chapter 13.
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