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Costs related to bankruptcy; factors leading to bankruptcy

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A) What are bankruptcy costs and what costs does it not take into consideration?

B) A company can suffer from increased expenses if it experiences financial difficulties even though it does not go bankrupt. Why?

Please fully elaborate on definitions and explanations.

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Solution Summary

The 370 word solution explains the costs in the various types of bankruptcy filings, but also provides a listing of types of actions that a company losing money can initiate to try to avoid filing bankruptcy.

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a.) What are bankruptcy costs and what costs does it not take into consideration?

Bankruptcy costs are only those administration expenses necessary to file, conduct and close a bankruptcy. It is easier to understand a Chapter 7 (liquidation) bankruptcy where all the assets and liabilities are cancelled, sold or otherwise disposed of.

Even Chapter 7 has differing rules because bankruptcy filings conform to state law, which tend to vary from state to state. For example, a homestead exemption is very common in which the court will not force the sale of ...

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