Corporate Bankruptcy – Advantages of a Chapter 11 Bankruptcy as an Investor

Typically, public companies prefer to file a Chapter 11 bankruptcy or a corporate bankruptcy as opposed to a Chapter 7 bankruptcy.  This allows the company to continue regular operations and remain open and it gives them an opportunity restructure, reorganize and possibly become profitable again.  A Chapter 11 corporate bankruptcy gives the company more control over the process, but the reorganization may not always be successful.  The company’s stocks and bonds may continue trading during the restructuring and reorganization process.  The company must report the bankruptcy on Form 8-K within 15 days.

The US Trustee will appoint at least one committee to represent creditors and stockholders during the corporate bankruptcy reorganization process.   The debtor is called the debtor in possession and needs to come up with a reorganization plan to restructure the business in order to pay creditors and investors over time.   This takes place under the supervision of the bankruptcy court.   This reorganization plan must be approved by the creditors,  investors and the bankruptcy court.  The court usually confirms the reorganization plan if it is reasonable, done in good faith and within the law even if it is rejected by creditors or stockholders.  Once the bankruptcy court has confirmed the reorganization plan, the company must submit a summary of the plan on Form 8-K.

The company will negotiate with the committee of creditors and shareholders and decide which debts can be adjusted or relieved in order for the company to survive and reemerge from the bankruptcy.  There may be more than one creditors committee.

Committee of Unsecured Creditors:  This committee represents all unsecured creditors.  

Committee of stockholders: This committee may be required to represent the interests of the stockholders

Other Committees: Creditors are categorized into classes depending on the type of debt.  There may be committees that represent a specific class of  creditors.

When all parties have agreed to the plan,  the court will confirm and certify the plan if it complies with the Bankruptcy Code.  The company will proceed and implement the plan. nUsually investors are informed of a company’s bankruptcy via the news or their broker.  People who hold bonds or stock on their own name usually receive this bankruptcy information by mail.

If the company has too much debt, cannot pay its creditors and a reorganization is not feasible, it may decide to file a Chapter 7 bankruptcy.  The bankruptcy trustee will liquidate all the company’s assets and use the proceeds to pay legal and administrative fees, then creditors.  Certain collateral is returned to secured creditors.  These secured creditors are grouped with unsecured creditors for the balance of their claim if the collateral cannot cover the complete claim.  If there is any money left,  unsecured creditors including bondholders  may receive some funds.  Filing a Chapter 7 bankruptcy does not require the company to notify stockholders since they are not entitled to payback if the shares have lost their value. Stockholders will have the opportunity to file claims if in the rare case all the creditors are paid in full.  The stock of a company that has filed a Chapter 7 bankruptcy is usually worthless.  Bonds may retain a fraction of their value.