Large corporate bankruptcies are complicated and painful, especially for stockholders.
Publicly traded companies frequently choose a Chapter 11 bankruptcy over the other option – Chapter 7.
In a Chapter 7 bankruptcy, the company is so far in debt that nothing can be done to save it.
A court-appointed trustee liquidates all the company’s assets and pays off creditors, often pennies on the dollar. The company’s stockholders are wiped out and the company ceases to exist.
A Chapter 11 bankruptcy allows the company to stay in business and prevents creditors from disrupting operations.
A plan for reorganizing the business is approved by the courts and the company emerges with much less or no debt.
How stockholders fare in a Chapter 11 bankruptcy depends on the reorganization plan.
However, in many cases, existing stockholders are wiped out – the existing stock is often delisted by the exchanges and ceases trading.
Bondholders may receive some payment, but often have their bonds converted to shares of stock in the reorganized company.
If the company emerges from bankruptcy and does well, the previous bondholders (now stockholders) may come out OK. However, some companies don’t survive even after Chapter 11.
Bankruptcies of large companies are very complicated and this explanation just skims the surface.
If you hold stocks or bonds in a company that files for bankruptcy protection, you will receive instructions from the court regarding your rights and options, if any.
In most cases, you will have little input into the process. You should receive notification of the filing and, in the case of bondholders, you may have the opportunity to vote on the reorganization plan.
In most cases, stockholders do not have a voice in the reorganization plan.
If you own stocks or bonds in a company the files for Chapter 7 bankruptcy, you will probably receive nothing for your investment. Bondholders may receive a partial payment, but not always. Your stock will probably be worthless.
In a Chapter 11 filing, your stock may be worthless or you may find your stake in the company is greatly diluted meaning the shares are worth much less than before the filing.
Complicated bankruptcy plans may differ on the particulars for stock and bondholders, so read the information you receive carefully.
