What Happens When A Company Files Chapter 11 Bankruptcy?

Chapter 11 bankruptcy differs from Chapter 13 in the fact that Chapter 11 bankruptcies are only for corporations. Companies do this for many reasons. They may want to reorganize their debts and regain their profitability. Companies can also file Chapter 7, in which they just simply go out of business and liquidate all their assets.

How it works:

Once a company files Chapter 11, all major financial decisions must be made by the bankruptcy court. Management within the company may still manage the regular, day-to-day operations.

Secured creditors are paid first, followed by unsecured creditors, and lastly, the company stockholders.

In A Chapter 11 Bankruptcy, the U.S. Securities & Exchange Commission makes sure that all stockholders are represented by an official committee. They also ensure that the corporation is not withholding information.

Committees made up of stockholders and creditors work with the company to organize a repayment plan. The U.S. Trustee, a branch of the Justice Department, appoints the committees.

While investors can still trade securities in the company during the Chapter 11 bankruptcy, the corporation will usually fail to meet the listing standards of Nasdaq and the New York Stock Exchange. Company shares may be traded on Pink Sheets or the OTCBB. In most cases, however, the reorganization plan set forth by the Chapter 11 bankruptcy will cancel all existing equity shares.

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