Bankruptcy Information Center

Bankruptcy and the Publicly Owned Company

Chapter 7 and the Publicly Owned Company

Chapter 7 bankruptcy is the most drastic step offered to a company that is experiencing financial difficulties. It is the most severe because the company will no longer be operational. Chapter 7 bankruptcy requires that all of the company's assets and liabilities be evaluated under the supervision of a bankruptcy court with disclosure to creditors. The company is effectively asking the court to discharge all debt; in exchange the company will liquidate all assets and disburse payments.

Liquidation

The bankruptcy court will appoint a trustee to liquidate all of the company's assets. The company will be required to disclose all income and assets to the trustee. After the disclosure, the trustee will liquidate the assets. The first to be paid will be the secured creditors. This is because the debt was backed by collateral. The next to be paid will be the unsecured creditors. Last will be the stockholders who may not be paid at all if there is not enough value in the liquidated assets to satisfy the secured and unsecured creditors. Bond holders, who have an agreement with the company to be paid back their principle, are in a better position than stockholders. Stockholders have undertaken a risk that distinguishes them from both secured creditors and bondholders.

Chapter 11 and 13 and the Publicly Owned Company

The difference between Chapter 11 and Chapter 13 bankruptcy is related to the size of the company. A Chapter 13 bankruptcy is simpler than a Chapter 11 bankruptcy and is determined by the dollar amount of debt, the Chapter 13 being used with a smaller company with less debt.

Chapter 13 and Chapter 11 bankruptcies are accomplished through reorganization of the company's debt. Most publicly-held companies opt for a reorganization of debt. This form of bankruptcy begins by filing and appointment by a federal court of a U.S. Trustee. The trustee will create committees to supervise and take into consideration the interests of stockholders, creditors and the debtor. All of the company's assets and liabilities are disclosed and scrutinized. A plan is then devised to map out a strategy allowing the company to emerge from debt. The stockholders, bondholders, and creditors vote for or against the reorganization plan. The bankruptcy court has the ultimate word on confirmation.

After confirmation, a detailed reorganization plan is submitted to the Security and Exchange Commission. Committees are appointed to administer and look after the interests of the creditors and ensure completeness. The company through distribution of payments and securities carries out the final step.

Trading of Securities During Bankruptcy

There is no federal law that forbids a company going through bankruptcy and reorganization to publicly trade its securities. However, the company may not qualify according to the rules of the exchange (e.g. the New York Stock Exchange or NASDAQ).

Conclusion

The form of bankruptcy a company pursues will depend on the size of the company and its desire to remain operational. If a company's debt is large enough to affect future profitability, Chapter 7 may be an option. Otherwise, Chapter 11 or 13 are options that may allow the company to survive.
If you are considering filing for bankruptcy you should consult an attorney. Bankruptcy lawyers are an excellent resource for this information.