Types of Corporate Bankruptcy

Investors should learn to distinguish between the two types of corporate bankruptcy. You've probably heard of the phrases "Chapter 11 Bankruptcy" and "Chapter 7 Bankruptcy." These pertain to the two types of corporate bankruptcy.

Specifically, Chapter 7 and Chapter 11 pertain to particular sections of the federal bankruptcy laws.

• Chapter 7 Bankruptcy

  Filing corporate bankruptcy under Chapter 7 of the federal bankruptcy laws is a declaration of absolute bankruptcy.

  After filing Chapter 7 bankruptcy, a company is required to cease all business operations immediately. A trustee is assigned to it. This trustee oversees the liquidation of the company's assets then uses the proceeds to pay off the company's debts.

• Chapter 11 Bankruptcy

  Filing corporate bankruptcy under Chapter 11 of the federal bankruptcy laws is an acknowledgment of severe liquidity problems (particularly a huge debt burden). Unlike Chapter 7 bankruptcy, however, Chapter 11 bankruptcy is not final.

  A company files Chapter 11 bankruptcy only to get a chance to turn things around and avoid total ruin. During the rehabilitation period, the company negotiates the terms of its loans with its creditors. It may seek lower interest rates, lower installment amounts or an extension of the loan period. In any case, the overall goal of such negotiations is to make loan servicing easier for the company and give the company a chance to recover.

  After filing Chapter 11 bankruptcy, a company can continue its business operations. The bankruptcy court assigns a trustee to the company. This trustee does not sell off the company's assets, but it has oversight functions on the company's business decisions. Simply put, he is there to ensure that the company makes decisions aligned with its goal of business recovery.

  Under a Chapter 11 bankruptcy, a company is given a chance to reorganize and rehabilitate itself. The chances of it recovering are not assured, however. If the company is unable to successfully renegotiate the terms of its loans or if it fails to make good on its promised payments, it may still ultimately end up filing for liquidation bankruptcy.

The implications of corporate bankruptcy to investors vary according to the type of bankruptcy provision used. Overall, however, corporate bankruptcy means bad things to investors.

SEC's Functions when a Public Company Files Corporate Bankruptcy

A company that has filed Chapter 11 bankruptcy must file asummary of the reorganization plan to the SEC. This is found on the Form 8-K. Changes to the reorganization plan must also be reported through Form 8-Kwithin 15 days of such changes.

This sums up SEC's oversight functions when it comes to bankruptcy procedures. Its role, basically, is to ensure that information about the company's reorganization is available to the public. It may also insist on a committee to represent investors' interest in reorganization plan deliberations. SEC may also commence an investigation if company insiders are suspected of engaging in securities fraud and are merely using bankruptcy laws to evade legal charges.

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