Filing for bankruptcy is often the last resort for most businesses, but it allows them to move on from a venture in a streamlined manner. In many ways, it allows them to operate and deal with their expenses on better terms. Here’s all you need to know about it:
Chapter 7
According to Chapter 7 of the U.S. Bankruptcy Code, the company that files for bankruptcy goes out of business after discontinuing all operations. As specified by the U.S. Securities and Exchange Commission, a trustee has to sell the company’s assets to pay off its debt with that amount.
The first to receive payments are any investors who signed up for the least risk, such as those holding corporate bonds. Stockholders might not receive proper compensation as the stock values go down. Considering a risk-return tradeoff, they come after the bondholders in receiving compensation.
Chapter 11
In a Chapter 11 bankruptcy, the company believes that after the bankruptcy proceedings, it can return to a decent financial position in the future. It allows the company to reorganize rather than go out of business. Companies that have plans that they can execute by restricting their unmanageable debts take on Chapter 11 bankruptcy.
It’s the more common approach for most companies as they can have a fresh start while fulfilling obligations. It’s expensive, meaning the company has to focus on all possible alternatives beforehand. If a company fails in its efforts, its assets are liquidated, and stakeholders are paid off according to the priority, as stated in Chapter 7.
How It Affects Investors
Even after bankruptcy proceedings begin for a company, its stocks and bonds are traded at much lower prices. Bonds for such businesses are referred to as junk, as their value tends to plummet. Essentially, many investors won’t get their full amount or any of their investment back in such a scenario.
For a Chapter 11 bankruptcy, stockholders and bondholders stop receiving their dividends and interest, and principal payments respectively. However, bondholders can acquire new stock in exchange for their bonds. Stockholders can receive new shares in the reorganization effort of the bankrupt company.
If you’re considering bankruptcy services for a corporation, work with us at Mirabile Law Firm. We’re an Illinois-based law firm with experienced professionals leading the company.
We also have estate planning lawyers, will and trust attorneys, along with immigration law services, and bankruptcy services for corporations in Naperville, Glen Ellyn, Carol Stream, Bolingbrook, and surrounding areas. Get in touch with us today.