This blog will discuss the issues faced by companies filing for both Chapter 7 and Chapter 11 Bankruptcy. First, though, let’s cover the differences between the two types. When a company files for Chapter 7, it liquidates all remaining assets to pay off debts to investors and creditors, going completely out of business in the process. In Chapter 11, a company restructures itself in order to eliminate debt, but otherwise remains in business. For this reason, it is typically the bankruptcy of choice for most companies that wish to continue operating.
What Companies Must Do
Corporate bankruptcy affects a vast number of people compared to personal bankruptcy. The first steps are for the company to meet with all relevant committees and create a plan moving forward. The company, working with a legal team, then prepares a disclosure statement and reorganization plan to be filed with the court. After SEC review of the plan, creditors and stockholders vote on it and the court confirms it.
What Happens to the Investors
Of course, bankruptcy for a company will affect its shareholders, too. After a Chapter 11 Bankruptcy, a company’s stock will typically be delisted from NYSE or Nasdaq due to failure to meet listing standards. Stockholders will not receive dividends during a bankruptcy, and bondholders will stop receiving principal and interest payments. Typically, bondholders fare better in a corporate bankruptcy than do stockholders because they are guaranteed a return on their principal investment plus interest, whereas stockholders are not.
The Future of the Company
Although corporate bankruptcy can seem like a bleak time, there is hope to rebuild the future of a company. Taking out new, secured loans after bankruptcy, maintaining all memberships and client relationships, and closely evaluating the cause of bankruptcy are all important steps in avoiding another crisis.
It is important that companies facing bankruptcy consult legal experts and financial advisors prior to taking any action toward filing for Chapter 7 and Chapter 13 bankruptcy. In no way does this blog post replace valuable legal counsel.