Filing for Chapter 11 bankruptcy protection means that a company is on the verge of bankruptcy but believes that it can once again become successful if it is given an opportunity to reorganize its assets, debts, and business affairs.

Although the Chapter 11 reorganization process is complex and expensive, most companies, if given the choice, prefer Chapter 11 to other bankruptcy provisions such as Chapter 7 and 澳洲幸运5官方开奖结果体彩网:Chapter 13, which cease company operations and lead to the total liquidation of assets to creditors. Filing for Chapter 11 gives companies one last oppജortunity🉐 to be successful.

Understanding Chapter 11 Bankruptcy

While Chapter 11 can spare a company from declaring total bankruptcy, the company's bondholders and shareholders are usually in for a rough ride. When a company files for Chapter 11 protection, its share value typically drops significantly as investors sell their positions.

Filing for bankruptcy protection means that the company is in such rough shape that it would probably be de-listed from the major exchanges such as the Nasdaq or the 澳洲幸运5官方开奖结果体彩网:New York Stock Exchange (NYSE) and relisted on the pink sheets or the 澳洲幸运5官ꦕ方开奖结果体彩网:Over-the-Counter Bulletin Board (OTCBB).

When a company going through bankruptcy proceedings is listed on the 澳洲幸运5官方开奖结果体彩网:pink sheets or OTCBB, the letter "Q" is added to the end of the company's 澳洲幸运5官方开奖结果体彩网:ticker symbol to differentiate it from other companies. For example, if a company with the ticker symbol ABC was placed on the OTCBB due to Chapter 11, its new ticker symbol would be ABCQ.

Under Chapter 11, corporations are allowed to continue business operations, but the bankruptcy court retains control over significant business decisions. Corporations may also continue to trade company bonds and stocks throughout the bankruptcy process but are required to report the filing with the 澳洲幸运5官方开奖结果体彩网:Securities and Exchange Commission within 15 days.

After Chapter 11 Filing

Once Chapter 11 bankruptcy is filed, the federal court appoints one or more committees that are tasked with representing and working with 澳洲幸运5官方开奖结果体彩网:creditors and shareholders of the corporation to develop a fair reorganization. The corporation, along with committee members, creat♑es a reorganization plan that must be confirmed by the bankruptcy court and agreed upon by all creditors, bondholders, and stockholders.

Chapter 11's Effect on Stocks and Bonds

Sometimes after a 澳洲幸运5官方开奖结果体彩网:reorganization, a company will issue new stock that is considered different from the pre-reorganization stock. If this occurs, investors will need to know whether the company has given its shareholders the opportunity to exchange the old stock for new stock, because the old stock will usually be considered useless when the new stock is issued.

Throughout the duration of the reorganization, bondholders will stop receiving coupon payments or principal 澳洲幸运5官方开奖结果体彩网:repayments. Furthermore, the company's bonds will also be downgraded to speculative-grade bonds, otherwise known as 澳洲幸运5官方开奖结果体彩网:junk bonds. Since most invest𓆉ors are wary of buying junk bonds, investors that want to sell their bonds will need to do so at a s🍨ubstantial discount.

After the reorganization process and depending on the terms dictated by the 澳洲幸运5官方开奖结果体彩网:debt restructuring plan, the company may require investors to exchange their old bonds for shares or new bonds. These 澳洲幸运5官方开奖结果体彩网:new issues of stocks and bonds represent the company's 🌄attempt to create a more manageable level 🌠of debt.

If the plan for reorganization fails and the co🔜mpany’s liabilities start to exceed its assets, then the bankruptcy is converted into a Chapter൩ 7 bankruptcy.

How Di🌠vision of Assets Differs Under Chapter 7 Bankruptcy

Under 澳洲幸运5官方开奖结果体彩网:Chapter 7 bankruptcy, all assets are sold for cash. That cash is then used to pay off legal and administrative expenses incurred during the bankruptcy process. After that, the cash is distributed first to senior debt-holders and then 澳洲幸运5官方开奖结果体彩网:unsecured debtholders, including owners of bonds. In the extremely rare event that there is still cash left over, the rest is divided among the shareholders.

However, if the reorganization plan ends up being successful and the company returns to a state of profitability, then multiple things could happen to investors’ pre-reorganization bonds or stock. In the case of bonds, investors may be obligated to exchange their old bonds for a combination of new bonds or stock, depending on the conditions required by the debt restructuring plan. In addition, the coupon and 澳洲幸运5官方开奖结果体彩网:principal repayments on the new debt instruments wou𒐪ld resume.

澳洲幸运5官方开奖结果体彩网:Stockholders, however, tend not to be so lucky. After restructuring, the company usually issues new stock, making the pre-reorganization stock worthless. In some cases, holders of the old stock are allowed to exchange their securities for a 澳洲幸运5官方开奖结果体彩网:discounted amount of the new stock, which is dictated by t🎉he plan of reorganization.

The Bottom Line

Shareholders in a company that files for Chapter 11 don't have a lot of options. Existing shares of common stock are usually canceled, and although you may be able to exchange your old shares for new shares in the reorganized business, you'll get fewer and they'll be lower in value. If the company is unsuccessful in reorganizing, stockholders may get nothing.