In the United States, there are several options for individuals or corporations who are unable to pay off their debts. The most common of these are chapter 7 and chapter 11 bankruptcy codes. Chapter 7 bankruptcy involves the liquidation of all non exempt assets. A firm would choose chapter 7 bankruptcy if their business model is not viable, meaning their marginal revenue is below average fixed costs. All the firms assets, such as machines and land, are sold and distributed among creditors. A firm would choose to file for chapter 11 bankruptcy if their business model is viable, but they are unable to pay off debts for some reason. With chapter 11 bankruptcy, unnecessary assets are liquidated. This could be a factory that is producing at a loss, or a surplus of workers that are causing a firms marginal revenue cost to be above its marginal revenue product. The firm then enters a contract with its creditors that allows the business to continue to operate, repaying its debts with any profits earned.
https://www.investopedia.com/ask/answers/differences-between-chapter-7-and-chapter-11/
https://money.howstuffworks.com/corporate-bankruptcy1.htm
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