Friday, October 05, 2007
What is Chapter 11 Bankruptcy?Chapter 11 bankruptcy is typically used for business bankruptcies and restructuring. It is not commonly used by individual consumers because it is far more complex and expensive to pursue. It allows businesses to reorganize themselves, giving them an opportunity to restructure debt and get out from under certain burdensome leases and contracts. Typically a business is allowed to continue to operate while it is in Chapter 11 although it does so under the supervision of the Bankruptcy court and its appointees.
Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company might use Chapter 11 of the Bankruptcy Code to reorganize its business and try to become more profitable again. Management continues to run the day-to-day business operations, but all significant business decisions must by approved by a bankruptcy court.
A company's securities may continue to trade even after the company has filed for bankruptcy under Chapter 11. In most cases, companies that file Chapter 11 are generally unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange (NYSE). However, even when a company is delisted from one of those major stock exchanges, their shares may continue to trade on either the OTCBB or the Pink Sheets. There is no federal law that prohibits trading of securities of companies in bankruptcy.
Investors should be cautious when buying common stock of companies in Chapter 11 bankruptcy. It is extremely risky and is likely to lead to financial loss. Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company's plan of reorganization will cancel the existing equity shares. This happens in bankruptcy cases because secured and unsecured creditors are paid from the company's assets before common stockholders. And in situations where shareholders do participate in the plan, their shares are usually subject to substantial dilution.
Sometimes, you may first learn about the company's bankruptcy in the news. If you hold stocks or bonds with a broker, your broker should forward information from the company to you. If you hold a stock or bond in your own name, you should receive information directly from the company. You may be asked to vote on the plan of reorganization although you may not get the full value of your investment back. Sometimes, stockholders get nothing back, and they don't get to vote on the reorganization plan. Even when stockholders do not vote, they should get a summary of the disclosure statement and a notice on how to file an objection to the plan.