Chapter 11 bankruptcy is usually used for businesses declaring bankruptcy. Under this plan, businesses reorganize and restructure the whole company. This usually means that the current management will continue to run all of the day-to-day operations, but the bankruptcy court has to approve all significant business decisions. This kind of bankruptcy allows a business to restructure its debt and get out from under certain contracts.
Most companies choose this type of bankruptcy because they can still run their business and control the whole bankruptcy process. Many times, the company can successfully figure out a plan where they return to profitability.
A company can also file for bankruptcy under Chapter 7. A business may choose this option if it intends to stop all operations and just go completely out of business. Its assets will then be liquidated by the bankruptcy court to pay off the debt.
When a company files for Chapter 11 bankruptcy, and if the company is successful in reorganizing, you may be able to exchange your old stocks or bonds for ones in the new company. However, your new stocks or bonds will probably be worth less than the original ones. On the other hand, under Chapter 7 bankruptcy, the stock of the company is generally worthless. Investors should be very cautious when buying common stock from companies under Chapter 11 bankruptcy because it is risky and may lead to financial loss.
When a company files this type of bankruptcy, the U.S. Trustee (the bankruptcy arm of the Justice Department) appoints one or more committees to represent the interest of creditors and stockholders and works with the company management to develop a plan to reorganize and try to get out of debt. The plan must then be accepted by the creditors, bondholders, stockholders, and the court. However, the court can confirm the plan on its own and disregard the creditors’ or stockholders’ votes to reject the plan if the court finds the plan to be fair.
If you have stock or bonds in a company that is undergoing this type of bankruptcy, you should receive information about the bankruptcy directly from the company. You may be asked to vote on the plan or reorganization, but sometimes stockholders don’t get to participate in the vote. With bankruptcy, you may also not get back the full value of your investment, and sometimes, stockholders don’t get anything back.
Since a Chapter 11 bankruptcy allows the company a chance to reorganize debts and get back on its feet, it is generally the type of bankruptcy most companies file for. While both Chapter 7 and 11 bankruptcy hurts shareholders since they often get nothing back or less than they originally invested, Chapter 7 means that the company is liquidating completely. While avoiding bankruptcy completely is of course the best course for a company or individual to take, this type of bankruptcy is generally the best choice if a company must go into bankruptcy, since this allows the management to keep some control of their company and attempt to put it back on its feet.
By Janelle Walker