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Filing for Chapter 11 Bankruptcy

A bankrupt company may turn to Chapter 11 of the Bankruptcy Code in order to start "reorganizing" its business and make an effort to become profitable again.

This article will help you learn more about Chapter 11 bankruptcy.

What is Chapter 11 Bankruptcy?

When a company files bankruptcy under Chapter 11 its management continues its day-to-day business operations. Additionally, during the Chapter 11 reorganization process the company's stock and bonds may continue to trade and the company should continue filing SEC reports.

However, all significant business decisions must be first approved by a bankruptcy court.

Reorganization Plan

One or more committees will be appointed by the bankruptcy arm of the Justice Department and their purpose would be to represent the interests of creditors and stockholders and develop a reorganization plan to get out of debt.

The reorganization plan should be accepted by the creditors, stockholders, bondholders, and confirmed by the court. The court has the final say and even if creditors or stockholders reject the plan the court can still confirm it and disregard their vote.

What Happens to the Stocks and Bonds of the Bankrupt Company under Chapter 11?

As mentioned above, under Chapter 11 company's securities may continue to trade. No federal law prohibits the trading of securities of the bankrupt company.

However, often such companies are unable to meet the listing standards of major stock exchanges, such as Nasdaq or the New York Stock Exchange. Yet, they may continue to trade on the Pink Sheets or the OTCBB.

During the company's bankruptcy, its bondholders will not receive interest and principal payments. They may receive new stock in exchange for their bonds, a combination of stock and bonds, or new bonds.

As for the stockholders, they will not receive dividends. The trustee may ask them to send back their old stock in exchange for new shares, which may be fewer and worth less than the old shares.

Have in mind that in most cases the reorganization plan cancels the existing equity shares. And if the company really manages to rehabilitate itself there may be two types of common stock trading for it:

  • the old stock that has been on the market when the company filed bankruptcy

    If this stock is traded on the Pink Sheets or the OTCBB its ticker symbol will have 5 letters and will end with "Q" as an indicator of the company's bankruptcy.

  • the new stock that has been issued as part of the reorganization plan

    This stock's ticker symbol will not end in "Q". However, if this stock has been authorized but not issued by the company its ticker symbol will end with a "V". The "V" will be removed from the ticker symbol when the company actually issues the authorized stock.

Final piece of advice:

Be cautious when buying common stock of companies filing bankruptcy under Chapter 11. Sometimes the reorganization plan works out successfully for the company and it returns to profitability but sometimes it liquidates despite the plan. It is very risky and too often than not leads to financial losses.

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