A bankruptcy is a tough pill to swallow, especially if you’re a devout investor in a company. Let’s take a look at the two major kinds of bankruptcy and learn the most Wibest FSMsmart Review essential things about them.
Two Major Kinds of Bankruptcy
According the Securities and Exchange Commission’s Chapter 7 of US Bankruptcy Code, “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 debt.”
However, not all debts are equal. Of course, the investors or creditors who have taken the least risk are going to receive Wibest Broker News payments first. For a simple instance, investors who hold the bankrupt company’s corporate bonds have a relatively reduced exposure.
Basically, such investors chose the safety of getting specified interest payments over the potential of getting any excess profits from the company.
Equity holders, on the other hand, have the full potential of seeing their share of the company’s retained earnings, which would be reflected in the stock’s price. However, the tradeoff is that the stock may also lose value.
As such, under Chapter 7, equity holders may not get fully compensated for the value of their shares.
Secured creditors are even more risk-averse than regular debt holders. They accept very low interest rates in exchange for the increased safety of corporate assets being pledged against corporate obligations.
Thus, when a company goes belly up, secured creditors are paid back before any regular debt holders start to get their slice of cake. This is called the principle of absolute priority.
Under Chapter 11 of the US Bankruptcy Code, the bankruptcy does not involve closure but a reorganization of the debtor’s affairs and assets. The company undergoing Chapter 11 bankruptcy expects to return to normal business operations and sound financial health in the future.
This kind of bankruptcy is usually filed by corporations that require time to restructure debt that has become unmanageable.
A Fresh Start
Chapter 11 offers the company a fresh start, dependent on its fulfillment of obligations under the reorganization plan. A Chapter 11 reorganization is considered to be the most intricate and generally most expensive of all bankruptcy proceedings.
Therefore, this type of bankruptcy is undertaken only after a company has already cancelled out all other alternatives.
Chapter 7 versus Chapter 11
Public companies gravitate towards Chapter 11 instead of Chapter 7 since it lets them still run their businesses as well as control the bankruptcy proceedings. Instead of merely turning over the assets to a trustee, the company has the chance to remake its financial framework and possibly become profitable again.
If the process fails, all the assets are liquidated and stakeholders get paid as per absolute priority.
It’s important to remember that when a company files for Chapter 11, a committee is assigned that represents the interests of the creditors and stockholders. This committee works with the company to hatch a plan to reorganize the company and to get it out of debt, remaking it into a profitable entity.
Shareholders may be given a vote on the company. However, since their priority goes second to all creditors, this is never really guaranteed.