If a business is badly in debt and unable to pay that debt, it may file, or be forced by creditors to file, for bankruptcy in a federal court under Chapter 7. A Chapter 7 filing means that the business stops operating unless it is continued by the Chapter 7 Trustee who is appointed almost immediately. The Trustee typically sells all of the company's assets and distributes the proceeds to the creditors.

Fully-secured creditors have a legal right to the collateral securing their loans or to the equivalent value of that collateral. This right cannot be taken away by bankruptcy. A creditor is fully secured if the value of the collateral equals or exceeds the amount of the debt. Fully-secured creditors are NOT entitled to participate in any distribution of liquidated assets which the bankruptcy trustee might make.

Additionally, all employees may or may not lose their jobs. When a large company enters Chapter 7 bankruptcy, entire divisions of the company may be sold intact to other companies during the liquidation.