When a troubled business is badly in debt and unable to service that debt or pay its creditors, it may file (or be forced by its creditors to file) for bankruptcy in a federal court under Chapter 7 (liquidation) or Chapter 11 (reorganization). A Chapter 7 filing means that the business intends to sell all its assets, distribute the proceeds to its creditors, and then cease operations.

This may or may not mean that all employees will lose their jobs; when a very large company enters Chapter 7 bankruptcy, it may be that entire divisions of the company are sold intact to other companies during the liquidation.

Secured creditors, such as bondholders, have a higher-priority claim on the proceeds than unsecured creditors, such as vendors who have not yet been paid for products they previously delivered to the company.

A corporation or other legal entity that is a debtor under Chapter 7 is not entitled to a discharge of its debts: once all assets of the company have been fully administered, the case is closed and the debts of the entity, theoretically, continue to exist.