Chapter 7 and 11 Bankruptcies explained in simple terms

[Oracle of Delphi]

A bankrupt company can file Chapter 11 of the Bankruptcy Code to "reorganize" its business. According to the SEC, if a business files Chapter 11, "Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court."

During Chapter 11 bankruptcy, the U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to represent the interests of creditors and stockholders. The committee works with the company to develop a plan of reorganization to get out of debt. The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. Once the plan is confirmed, a more detailed report must be filed with the SEC on Form 8-K.

The trustee may ask stockholders to send back the company's stock in exchange for new shares in the reorganized company. These new shares may be fewer in number and worth less. Stockholders will also stop receiving dividends. Under Chapter 11 reorganization, the company will explain investors' rights and what investors can expect to receive, if anything, from the company.

Bondholders will stop receiving interest and principal payments, and in exchange for their bonds may receive new bonds, new stock, or a combination of stock and bonds.

The SEC site further explains that when a company files under Chapter 7, the company stops all operations and goes completely out of business. A trustee is "appointed to 'liquidate' (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors."

If the company files for Chapter 7, the stock is usually worthless and stockholders lose any money they've invested in the company.

In bankruptcy, those who take the least risk are paid first. Unfortunately for most of us, the shareholders are at the end of the payment line. First to be paid are the secured creditors, usually a bank. Second are unsecured creditors, such as banks, suppliers, or bondholders. Finally, stockholders are paid out -- a tough place to be for the "owners of the company."

Edited March 6, 2009 by Pontiac Custom-S

[Drew Dowdell]

Tough place for sure, but appropriate for not taking action and voting out senior management.

[Teh Ricer Civic!]

Take note that the Government will not let a company of this size go straight to chapter 7, it must go through 11 first.

But really, Chapter 12 is where its at.

[Lamar]

Take note that the Government will not let a company of this size go straight to chapter 7, it must go through 11 first.

But really, Chapter 12 is where its at.

Family farmers and fishermen...?