Bankruptcy and Investment Recovery

What happens to investors’ investments when companies go bankrupt? Well, it depends on the bankruptcy chapter filed, whether Chapter 11 reorganization or Chapter 7 liquidation. Investment recovery may be an option.
In Chapter 11, a company attempts to get rid of its debt in order to continue operating, even trading publicly during the proceedings, and turn the company around to profitability; whereas in a Chapter 7, the company goes out of business and attempts to sell assets to repay debts to creditors and investors.
Secured creditors, those with collateral backing their loans or investments, are given priority repayment status. In other words, they get paid back before unsecured creditors such as credit cards. Bondholders usually recover their principal investment with interest but stockholders, as owners of a piece of the company, may or may not recover their investments.
Often after filing for Chapter 11, a publicly traded company’s stock value drops significantly after being delisted from major stock exchanges. Owners of common stock in private corporations lose their investment completely after shares cancellation. Although stockholders and bondholders can sometimes exchange old shares for new ones in the reorganized company for lesser value or fewer shares. As such, it is important to identify new stocks from old stocks in re-emerging companies in order to make smart investment decisions. Certainly no dividends get paid during bankruptcy.
The advantage to an investor in a Chapter 11 is participation in restructuring. Several committees, including a committee representing investors and creditors, oversee the reorganization plan that generally requires approval by all the committees before the bankruptcy judge confirms the company’s reorganization plan to get out of bankruptcy. In committee, investors get to negotiate which debts get paid and which relieved under the plan.
Most stockholders confirm a reorganization plan only through committee appointed to represent all investor interests; individual investors usually do not vote unless notified of possible eligibility to vote, in which case that voter receives a voting ballot, summary of the plan and disclosure statement about the company and its plan.
In Chapter 7, the corporation goes out of business and an independent trustee sells all company assets, which proceeds pay administrative and legal fees and then creditors, if anything is left over. Secured creditors get their collateral back and get paid like any other unsecured creditor if the collateral is insufficient to cover the debt, meaning they get paid with whatever is left after payment of administrative, legal and other expenses of administering the bankruptcy.
For the most part, both stockholders and bondholders lose their investments above the value of any collateral returned, though not always. An experienced Chapter 7 attorney in Tampa is able to evaluate the investment recovery possibility in part or in whole from a Chapter 7 bankruptcy; contact us.