The company, whose founders include Titanic director James Cameron, listed total debts of $214.9m and total assets of $205m in its Chapter 11 filing.
Digital Domain said it had agreed to sell its production business to private equity fund Searchlight Capital Partners for $15m. The sale to Searchlight, which manages more than $860m, is subject to potential other bids through a one-day auction on 21 September, as required by the bankruptcy code.
The bankruptcy is a black eye for Florida state and local officials who committed $135m to subsidise the construction of a state-of-the-art studio in Port St Lucie, which the company closed last week.
Struggling with low margins
It was not immediately clear how much of the promised subsidies were paid, but the Associated Press reported on Monday that Governor Rick Scott had ordered a probe into the state incentives.
Digital Domain has worked on more than 90 major motion pictures, including Pirates of the Caribbean: At World's End, Transformers, The Curious Case of Benjamin Button, Star Trek and X-Men: First Class.
The company also recently ventured into movie production by co-producing the movie version of the popular science fiction novel Ender's Game, starring Harrison Ford, which is expected to be released next year.
Digital Domain, like other industry players, is struggling with low margins as movie studios can pick from a range of vendors around the world to produce computer-generated images.
The company specialises in creating realistic computer-generated human characters, and said in June it planned to produce virtual Elvis Presley likenesses across various platforms, including live shows, TV and online.
Digital Domain raised $42m in an initial public offering in November but said last month that it was looking at strategic alternatives and had hired Wells Fargo Securities LLC as financial advisor.
In 'profound disagreement'
The company said in court documents that it was in breach of conditions on some borrowing.
"As a result of negative working capital, the company failed to meet the liquidity covenants and was running out of cash," Chief Restructuring Officer Michael Katzenstein said.
Former Chairman and Chief Executive John Textor, who is also the company's second-biggest shareholder, resigned last week, saying he was in "profound disagreement" with the decision to close the Florida studio.
As of 28 August, Textor controlled about a quarter of Digital Domain, according to Thomson Reuters data. Private equity firm Palm Beach Capital is the company's largest shareholder with a 38% stake as of 14 August.
Searchlight, which manages about $860m, was founded in 2010 by senior partners from investment management firms Kohlberg Kravis Roberts & Co, the Ontario Teachers' Pension Plan and Apollo Global Management LLC.
Digital Domain listed Reliance Mediaworks Ltd, Legendary Pictures and Bell Technologies Inc as among its largest unsecured creditors.
Digital Domain shares closed at 55.4 cents on Monday, giving it a market value of $24m, down from about $400m on 1 May when the stock traded as high as $9.16.
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