Will Bankruptcy Affect My Partners Assets
It may affect your partner’s assets if:
- They jointly own an asset with you -; A joint asset is an asset owned by more than one person. Your trustee will have an interest in your share of the asset e.g. if you have a bank account in joint names, the trustee can claim your half of the balance.
- They are entering into bankruptcy – The trustee would have an interest in the full amount of any joint assets.
- They are in possession of an asset owned by you – Including money, real estate, motor vehicles and other property.
- They own assets that you contributed towards or helped purchase – This includes assets not registered in your name – e.g. a house or car.
Why Chapter 11 Bankruptcy Is Used
A company filing for Chapter 11 is requesting court-approved protections from their debts. They will still operate, and while they are on the verge of insolvency, they are requesting protection so that they can become successful after reorganizing debts owed, assets, and all business management affairs.
Chapter 11 works as an official reorganization. It is expensive, complicated, and most businesses will choose Chapter 11 because it ensures that they can remain open. If a company were to file for Chapter 7 bankruptcy, then they must cease operations which negatively impacts the business, employees, and shareholders.
Chapter 11 spares the business from full bankruptcy. However shareholders are still affected even with the company operating as it should.
Advantages And Disadvantages Of Bankruptcy
If you’re trying to decide whether you should file for bankruptcy, your credit is probably already damaged. But it’s worth noting that a Chapter 7 filing will stay on your for 10 years, while a Chapter 13 will remain there for seven. Any creditors or lenders you apply to for new debt will see the discharge on your report, which can prevent you from getting any credit.
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What Can A Shareholder Do Next
Shareholders may be able to sell their shares of stock if its still listed on an exchange or they can sell it over the counter and may have to take a loss. If they cant sell, theyll have to wait out the bankruptcy and hopefully get some financial relief in the future.
However, a likely outcome is that the company will cancel all the existing stock, rendering your shares worthless.;
If, as a shareholder, you have faith in the management and business model, its possible that the company will recover and the stock price will follow suit. That may be a risky bet, however, because theres a high probability the company will cancel your shares.
Should the company make it out of bankruptcy, then theres a chance itll offer its pre-bankruptcy stock in the over-the-counter market and then offer new stock thats publicly traded on the stock market.;
If you want to buy back into the company after bankruptcy, know that the companys OTC stock will have a Q at the end of the ticker name. This old stock is more volatile and could be worth very little. The new stock the company sells may have a V at the end of the ticker name or wont have any additional letters.
Two Types Of Bankruptcy Protection
Whether you get to keep your stocks depends largely upon which type of bankruptcy protection for which you file. There are two choices for consumers: You can file for Chapter 13 bankruptcy protection, in which you’ll pay back your debt with an interest-free repayment plan, or Chapter 7, in which your assets are liquidated to pay off all or part of your debt.
The Value Of Staying Informed
When buying stocks at a company, it is essential to stay informed about the companys activities and operating status. You dont want to be caught by surprise when hearing about bankruptcy in the news. The company is responsible for sending you information if you hold a stock in your name. If a stock is held through a financial planner, they should forward this information to you. If the company, indeed, files for bankruptcy, you may or may not be asked to vote on the recovery plan. As mentioned, shareholders are the last in line to receive any payout.;;
Whatever type of bankruptcy a company files, stocks are likely to be worthless, says the SEC. This is because liquidated assets are divided first between secured creditors , then unsecured creditors , and lastly, between stockholders. These liquidated assets will only be divided if the shares are not canceled as part of the reorganization plan. Having a financial planner by your side when making investments will ensure your money is best managed by someone who understands your unique financial situation.
What If The Company Fails To Finish Their Debt Restructuring Plan
A company must follow its debt restructuring plan, which allocates specific payment amounts to creditors. The company is following a court-ordered repayment plan. And when they fail to comply with that reorganization or their liabilities exceed their assets, they may opt to convert into Chapter 7 bankruptcy.
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Modern Law And Debt Restructuring
The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of the business.
For private households, some argue that it is insufficient to merely dismiss debts after a certain period. It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur. It has been stressed that debt advice, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditures must be equally provided during this period of rehabilitation . In most EU Member States, debt discharge is conditioned by a partial payment obligation and by a number of requirements concerning the debtor’s behavior. In the United States , discharge is conditioned to a lesser extent. The spectrum is broad in the EU, with the UK coming closest to the US system . The Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law in 2003 which provides for debt settlement plans that can result in a reduction of the debt or an extension of the payment period of maximally five years , but it does not foresee debt discharge.
When The Bankruptcy Order Is Made
The early stages of a bankruptcy are normally handled by an official receiver. An official receiver works for the Insolvency Service and is attached to the court. They will also be your trustee unless an insolvency practitioner is appointed to take over that role. The trustee will realise any assets .
The official receiver will write to you within 2 weeks of the bankruptcy order being made, explaining what you need to know and what you must do.
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The Role Of An Examiner
The appointment of an examiner in a chapter 11 case is rare. The role of an examiner is generally more limited than that of a trustee. The examiner is authorized to perform the investigatory functions of the trustee and is required to file a statement of any investigation conducted. If ordered to do so by the court, however, an examiner may carry out any other duties of a trustee that the court orders the debtor in possession not to perform. 11 U.S.C. §;1106. Each court has the authority to determine the duties of an examiner in each particular case. In some cases, the examiner may file a plan of reorganization, negotiate or help the parties negotiate, or review the debtor’s schedules to determine whether some of the claims are improperly categorized. Sometimes, the examiner may be directed to determine if objections to any proofs of claim should be filed or whether causes of action have sufficient merit so that further legal action should be taken. The examiner may not subsequently serve as a trustee in the case. 11 U.S.C. §;321.
Examiners may not be appointed in subchapter V cases. 11 U.S.C. §;1181 .
Issuance Of New Shares
In many cases, the old shares of the company facing bankruptcy simply cease to exist. Hence, they become worthless. In their place, a new class of equity shares issues. These shares are generally issued to the creditors who have accepted equity in lieu of their debt. Sometimes, this new equity is also issued to existing shareholders. The number of shares or the value of shares issued may be reduced. From a shareholders point of view, this is a grave loss. Ideally, the value of the shares that they hold is being transferred to the debt holder. However, this can be considered to be fair because the shareholders were in command of the company when it was making losses and hence can be considered to be responsible for the downturn.
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Who Develops The Company’s Reorganization Plan
Committees made up of stockholders and creditors will develop the reorganization plan. These groups will negotiate with the company to decide which debts should be relieved to help the company successfully reemerge from its corporate bankruptcy.
There are three main types of committees:
Official Committee of Unsecured Creditors
This mandatory committee represents all unsecured creditors, with the “indentured trustee” often sitting in.
Official Committee Representing Stockholders
May be appointed to address stockholders’ specific concerns, but not a requirement.
Additional Committee Representing Specific Class of Creditors
May be selected to represent employees, subordinate bondholders, or another distinct class of creditors.
The Chapter 7 Process
A Chapter 7 bankruptcy starts with and ends with a discharge of debt. The Chapter 7 bankruptcy process officially starts when you file your bankruptcy petition and thatâs when the automatic stay goes into place.Youâll have to get your documents together and fill out bankruptcy forms to share your financial information with the bankruptcy trustee, creditors, and the judge, but it will be worth your time. The creditors will get paid what you can afford to pay, and unsecured debt will be resolved. The whole process can be done in 3-4 months, depending on your personal finances.
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How Does Chapter 11 Work
The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to represent the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt. The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders vote to reject the plan, the court can disregard the vote and still confirm the plan if it finds that the plan treats creditors and stockholders fairly. Once the plan is confirmed, another more detailed report must be filed with the SEC on Form 8-K. This report must contain a summary of the plan, but sometimes a copy of the complete plan is attached.
What Is The Role Of The Us Securities & Exchange Commission In Chapter 11 Bankruptcies
Generally, the SEC’s role is limited. The SEC will:
- review the disclosure document to determine if the company is telling investors and creditors the important information they need to know; and
- ensure that stockholders are represented by an official committee, if appropriate.
Although the SEC does not negotiate the economic terms of reorganization plans, we may take a position on important legal issues that will affect the rights of public investors in other bankruptcy cases as well. For example, the SEC may step in if we believe that the company’s officers and directors are using the bankruptcy laws to shield themselves from lawsuits for securities fraud.
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What Cant Bankruptcy Do
Bankruptcy doesnât make all debt disappear. Youâll still owe child support, alimony, most IRS debt, court fines, and student loan debt. Those are non-dischargeable debts. Youâll also have to pay the debt that you incurred after your petition was filed. Bankruptcy will dismiss old utility bills, but not current bills. Bankruptcy only helps with pre-bankruptcy debt.
If a creditor files an Objection to Discharge, which they might if they think you never planned to pay for the debts you incurred or that you can pay, the judge will decide on the discharge. Bankruptcy is not a way to accumulate assets without paying for them. You canât hide assets in bankruptcy, everything goes on the table. If you have a car loan, the only way to keep your car is to pay for it. Whether thatâs through a reaffirmation agreement that keeps you obligated to pay off the car even after your discharge has been entered, or by paying the fair market value of the vehicle through a redemption. Finally, bankruptcy does not increase your income.
Now that we have a general idea of what the concept of bankruptcy stands for, letâs take a closer look at the different types of bankruptcy an individual can file.
Understanding Chapter 7 Bankruptcy
Under Chapter 7 bankruptcy protection, a trustee will place a dollar amount on your assets, sell them off and then divide the funds among your creditors. This means that you can lose your stocks along with other assets such as your house and cars to eliminate your debt. Whether this approach is taken and which assets are sold usually depends upon the size of the debt. You might not need to sell off all of your assets to pay down your entire debt. In such a case, you could keep some of your assets, including your stocks.
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The Us Trustee Or Bankruptcy Administrator
The U.S. trustee plays a major role in monitoring the progress of a chapter 11 case and supervising its administration. The U.S. trustee is responsible for monitoring the debtor in possession’s operation of the business and the submission of operating reports and fees. Additionally, the U.S. trustee monitors applications for compensation and reimbursement by professionals, plans and disclosure statements filed with the court, and creditors’ committees. The U.S. trustee conducts a meeting of the creditors, often referred to as the “section 341 meeting,” in a chapter 11 case. 11 U.S.C. §;341. The U.S. trustee and creditors may question the debtor under oath at the section 341 meeting concerning the debtor’s acts, conduct, property, and the administration of the case.
In North Carolina and Alabama, bankruptcy administrators perform similar functions that U.S. trustees perform in the remaining forty-eight states. The bankruptcy administrator program is administered by the Administrative Office of the United States Courts, while the U.S. trustee program is administered by the Department of Justice. For purposes of this publication, references to U.S. trustees are also applicable to bankruptcy administrators.
Your Options Under Chapter 11
Assuming a company of the stock you own declares Chapter 11 bankruptcy, what can you do?
First, it’s important to know that once bankruptcy is filed, stockholders will not receive previously scheduled dividend payments and bondholders will not receive principal and interest payments.
One option is to stand pat and maintain your ownership in the stock. In an optimal scenario, the company could negotiate a deal with its creditors under bankruptcy protection laws, reorganize and recover, and/or receive emergency funding from investors .
For example, in June 2009, General Motors declared Chapter 11 bankruptcy, and was rescued by the US government. To date, General Motors is the largest company to ever declare bankruptcy that is still in operation, having $82 billion in assets at the time.
Stockholders may be asked by the court-appointed trustee to exchange current stock holdings for new shares in the reorganized company. The trustee may send back new shares that have less proportional ownership in the reorganized company. The trustee will also inform existing shareholders of their new rights, and if anything is expected to be received from the company.
For example, if a company’s ticker symbol on a major exchange used to be “WXYZ,” it may be listed on the OTCBB or Pink Sheets under “WXYZQ.” If new shares have been issued, then the company could have multiple types of shares trading at the same time under different names and ticker symbols.
Why Its Risky To Invest In A Company With Bankruptcy News
We dont want to scare you, but education goes a long way in the investment world.
According to the US Securities and Exchange Commission , investing in bankrupt companies is likely to lead to financial loss.;
In these circumstances, a publicly traded company goes bankrupt because its revenue isnt on par with its debts. Over time, this creeps up on the company, ultimately causing it to make the radical decision of bankruptcy. You can imagine that any surviving companies will be indebted to taxes, lenders, creditors, bondholders and preferred shareholders in that order.
It sounds harsh, but its the truth. Common shareholders get whats called a residual claim of the companys assets , which means anything thats left over after all prior obligations have been paid in full. When you divvy up the remaining assets after liquidation between all common shareholders, youre often left with a small amount of money if anything at all.
Oftentimes, a company is unable to pay all prior obligations in full, which leaves common shareholders without payout. And even when the wealth does manage to trickle all the way down the food chain, its likely not the full value.;
Its not an ideal situation, but a common shareholders stocks dont hold much weight in situations of corporate bankruptcy. Unfortunately, the powerful people tend to get paid first.