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What Does Chapter 11 Bankruptcy Mean For Shareholders

Consequences Of Chapter 11 Bankruptcy

PG& E preparing a Chapter 11 bankruptcy protection filing

The reason that corporations prefer a chapter 11 bankruptcy is that it allows them to stay alive while working through financial difficulties. Company executives continue to make operational decisions for the company but financial decisions must be approved by the bankruptcy court. The company, therefore, could not invest in new assets or businesses without court approval.

Companies that have filed for chapter 11 bankruptcy may have a more difficult time obtaining new lines of credit or getting funding. The credit that is obtained must be approved by the bankruptcy court and it is often at a higher interest rate than for those without a bankruptcy on their record.

Does My Stock Or Bond Have Any Value

Usually, the stock of a Chapter 7 company is worthless and you have lost the money you invested.

If you hold a bond, you might only receive a fraction of its face value. It will depend on the amount of assets available for distribution and where your debt ranks in the priority list on the first page. If your bond is secured by collateral, your payment will depend in large part on the value of the collateral.

The Process For Chapter 11 Bankruptcy

A Chapter 11 case starts with the filing of a petition in the bankruptcy court where you are a resident. The petition may be voluntary or involuntary. A voluntary petition is submitted by the debtor, on the condition that no prior bankruptcy petition was dismissed due to the debtors intentional failure to appear in court or comply with court orders. Upon filing the petition, the debtor must submit a schedule of current income and expenditures, assets and liabilities, executory contracts, and unexpired leases, as well as a statement of financial affairs. After the debtor has filed the petition, they automatically assume the role of debtor in possession and take control of the business operations and assets during the reorganization. An involuntary petition is filed by creditors who meet certain requirements provided by the bankruptcy court.

The voluntary petition includes the debtors tax identification number, the location of principal assets, residence, and his intention to file a plan of reorganization. When receiving the petition, the bankruptcy court is required to charge a $1,167 filing fee and a $500 administrative fee. The fee is paid to the court clerk in whole, or in installments as decided by the court. If the court allows payment in installments, the debtor is limited to four installments, with the final payment not being later than 120 days from the date of the case filing.

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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 .

Bankruptcy Impact On Stocks

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Investors who own shares of a company that has declared bankruptcy face a difficult choice: Do you hang onto the shares or do you cut your losses and attempt to sell your shares?

It’s entirely possible that an investment in stock can lose money and, in the worst-case scenario, the stock value could go to zero. Unfortunately, the shares of a company that files for bankruptcy are at heightened risk of the latter occurring.

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Diverse Types Of Unsecured Creditors

Vendors are only one type of unsecured creditor in the general unsecured class. In a large bankruptcy case, there can be thousands or tens of thousands of other unsecured creditors in the same bucket. Since, in general, all unsecured creditors must receive the same rate of recovery on their prepetition claims, it can be helpful for vendors to monitor developments affecting other unsecured creditors. For example, the trading price of an unsecured bond may indicate the recovery rate for all unsecured creditors, including vendors.

Types of Unsecured Creditors

There are many types of unsecured creditors which may include:

  • Utilities that have provided unbilled, prepetition services to the debtor
  • Vendors who are awaiting payment after shipping goods or providing services to the debtor in the prepetition period
  • Landlords who entered into prepetition leases that have been rejected by the debtor in the postpetition period and have damages resulting from such breach
  • Plaintiffs with meritorious litigation claims against the debtor
  • Investors who hold bonds, debentures, subordinated notes, and other types of unsecured securities
  • Counterparties with swaps, futures, or other trades with the debtor that are unsettled and in-the-money as of the petition date
  • Governments due unpaid, prepetition, nonpriority taxes
  • Employees who are due unpaid, prepetition wages and benefits
  • Retirees due unfunded amounts from pensions

Who Gets Priority Under A Ccaa Canada Filing

Not all creditors are treated equally. There is a priority generally established for the ranking of creditors and the order in which they might be paid by a debtor.

First in a CCAA Canada restructuring, will be any government claims that rank as a priority deemed trust claim. Next will be any new charges ordered by the court as part of the restructuring. Examples of such court-ordered security charges are Key Employee Retention Plans, financing the company needs in order to survive during the restructuring period and the costs of the professionals involved in the restructuring for the company.

Secured creditors, including lenders and bondholders, usually head the list next when it concerns getting back their money. Secured creditors might hold security such as a general security agreement and/or a mortgage as security for their debt held.

Unsecured creditors follow next on the list of creditors. Unsecured creditors have supplied goods or services on credit to the company without being given any security. In the many retailer filings that have been in the news recently, even customers who have paid deposits for items not yet picked up or who have gift cards are also unsecured creditors. Last on the list are the shareholders.

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Where Can I Find More Information

The Company. – Contact the investor relations department in the company’s home office. They can give you more information on the bankruptcy proceeding, including the name, address, and phone number of the court handling the bankruptcy.

Your Broker. – If you can’t find information in the newspaper or the library, or you haven’t received any correspondence from the company, call the person who sold you the investment.

The SEC. – Companies file regular reports with the SEC in a computer database known as EDGAR. For example, a company declaring bankruptcy will file a form 8-K that tells where the case is pending and which chapter of bankruptcy was filed. You can access EDGAR through your computer at: If you don’t have access to a computer, your public library may have a computer you can use. You can also request a copy of Form 8-K, or any other reports that the company files with the SEC, see “How to Request Public Documents“. You might also be able to get copies of SEC filings from your full-service stockbroker, or the company itself.

U.S. Trustee at the Department of Justice. – The U.S. Trustee has broad administrative responsibilities in bankruptcy cases. Check the U.S. Trustee’s website, your local telephone book, or the public library for the field office closest to you, and contact them for information on the status of the bankruptcy.

Chapter 11 Business Bankruptcy

PG& E Officially Files For Chapter 11 Bankruptcy

The debtor continues to operate the business, though the bankruptcy court must approve major decisions. It can also appoint a trustee to take over if it finds sufficient cause, like fraud, dishonesty or incompetence.

Some of the biggest companies in America have filed for Chapter 11. Heading that list is General Motors, which filed in 2009.

It sold companies subsidiaries like Saturn, Hummer and Saab. It also got a $51 billion bailout from the U.S. Treasury which ended up costing taxpayers about $12 billion after all the smoke cleared.

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The Chapter 11 Debtor In Possession

Chapter 11 is typically used to reorganize a business, which may be a corporation, sole proprietorship, or partnership. A corporation exists separate and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation does not put the personal assets of the stockholders at risk other than the value of their investment in the company’s stock. A sole proprietorship , on the other hand, does not have an identity separate and distinct from its owner. Accordingly, a bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners-debtors. Like a corporation, a partnership exists separate and apart from its partners. In a partnership bankruptcy case , however, the partners’ personal assets may, in some cases, be used to pay creditors in the bankruptcy case or the partners, themselves, may be forced to file for bankruptcy protection.

Railroad reorganizations have specific requirements under subchapter IV of chapter 11, which will not be addressed here. In addition, stock and commodity brokers are prohibited from filing under chapter 11 and are restricted to chapter 7. 11 U.S.C. § 109.

Trading A Stock In Bankruptcy: 5 Facts

  • Publish date: Sep 23, 2010 3:48 PM EDT

The Blockbuster bankruptcy hasn’t slowed down trading activity in shares of the distressed video rental company. Here are 5 important things to know about trading shares of a Chapter 11 bankruptcy company.

Editor’s Note: This story was published in Sept. 2010. Since then, Blockbuster’s pink sheets have been temporarily suspended by the SEC.

NEW YORK (

) — The Chapter 11 bankruptcy announced by

Blockbuster

on Thursday didn’t slow down trading in shares of the video rental company. In fact, trading in its shares was more furious than ever.

An investor might rightly wonder why anyone would trade shares of a company that has declared itself bankrupt. An investor might also wonder how a company can even continue to trade shares after declaring bankruptcy.

Companies in Chapter 11 can and do trade shares, and those shares can re-emerge with the company after the bankruptcy process is complete. That is, if the company re-emerges from bankruptcy as a viable public company. In any event, trading in shares of companies going through the bankruptcy process is a high risk strategy.

Here are 5 key questions and answers about trading in shares of a company that has declared Chapter 11 bankruptcy, courtesy of the Securities and Exchange Commission .

QUESTION 1: How can shares of a company that is in Chapter 11 bankruptcy proceedings continue to trade?

ANSWER:

QUESTION 2: What is the risk level of trading in shares of a Chapter 11 company?

ANSWER:

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Company Is Removed From Major Exchanges

Any time a company files for Chapter 11 bankruptcy, the chances of them being delisted from the major exchanges, such as the New York Stock Exchange and Nasdaq, is high. Exchanges do not want to offer shares on companies under bankruptcy because these carry a high risk of failure. Once removed, companies filing Chapter 11 are then re-listed on the pink sheets, known as the Over-the-Counter Bulletin Board .

Once on the pink sheets with the Q added to their ticker symbol, the company will stand out from others. You know which companies are currently in Chapter 11 because they have the Q symbol after their exchange symbol. For example, if company XYZ files for Chapter 11 and they are listed on the pink sheet, they will now have XYZQ as their ticker.

How Will I Know What’s Going On

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Sometimes, you may first learn about a bankruptcy in the news. If you hold stock or bonds in street name with a broker, your broker should forward information from the company to you. If you hold a stock or bond in your own name, you should receive information directly from the company.

You may be asked to vote on the plan of reorganization, although you may not get the full value of your investment back. In fact, sometimes stockholders don’t get anything back, and they don’t get to vote on the plan.

Before you vote, you should receive from the company:

  • a copy of the reorganization plan or a summary
  • a court approved disclosure statement which includes information to help you make an informed judgment about the plan
  • a ballot to vote on the plan and
  • notice of the date, if any, for a hearing on the court’s confirmation of the plan, including the deadline for filing objections.

Even when stockholders do not vote, they should get a summary of the disclosure statement, and a notice on how to file an objection to the plan.

Stockholders may also receive other notices unrelated to the plan of reorganization, such as a notice of a hearing on the proposed sale of the debtor’s assets, or notice of a hearing if the company converts to a Chapter 7 bankruptcy.

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What Is The Advantage Of Filing Under Chapter 11

Public companies typically prefer to file under Chapter 11 bankruptcy because it:

  • Allows the company to continue operating
  • Provides an opportunity for a turnaround

A successful reemergence doesn’t always work out, but Chapter 11 gives the company more control over the process.

Also, the company may continue to trade its stocks and bonds while going through a reorganization but must report the bankruptcy on Form 8-K within 15 days.

Confirmation Of The Reorganization Plan

The bankruptcy court requires the debtor to propose a plan within 120 days from the date of filing the bankruptcy petition. If the debtor proposes a reorganization plan within the stated period, the court grants another 180 days to allow the debtor to obtain confirmation of the plan. The plan designates classes of claims for treatment in the reorganization. Also, the plan lists the creditors in order of priority, with secured creditors topping the list.

Chapter 11 dictates that the entire class of creditors is deemed to have accepted the reorganization plan if it is accepted by creditors with at least two-thirds in amount and at least one-half of the number of allowed claims in the class. Also, the plan must be approved by at least one class of creditors who hold impaired claims. The holders of unimpaired claims are deemed to have accepted the plan.

If at least one class of creditors vote to object, the plan can still be confirmed as long as the requirements are met. The basis of this confirmation is that the plan must be fair and equitable, and should not discriminate against that class of creditors. If no objections are filed, the court must be satisfied that the plan has complied with all the requirements for confirmation. The court must also find that the plan is feasible, it is proposed in good faith, and that the plan and its components have complied with Chapter 11. The plan then becomes binding and identifies how debts will be treated for the plan duration.

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Chapter 11 Vs Chapter 7

With a Chapter 7 bankruptcy, there is no reorganization plan or restructuring of debt to continue operations. Its a straight liquidation of assets in which a trustee is appointed to sell a persons non-essential assets.

Houses and cars are usually put up for sale. Among the items that can be protected are pensions, reasonable necessary clothing, household goods and jewelry up to a certain value.

The proceeds go to creditors and the filer is legally cleared of debt. Legal fees are usually not an issue, though there is a $245 filing fee.

Thats the good news. The bad news is your is wrecked and you will have a near-impossible time getting a loan at a reasonable interest rate.

» More about:Chapter 7 vs. Chapter 11 Bankruptcy

Chapter 11 Personal Bankruptcy

Hertz shares jump on bankruptcy plan that would pay shareholders

So why would an individual choose Chapter 11? Its a viable option if they A) dont want to liquidate all their assets in Chapter 7, or B) have too much debt to qualify for a reorganization plan under Chapter 13.

Your debts cant exceed $1,184,200 in secured debt and $394,725 in unsecured debt in order to qualify.

Thats why celebrities and pro athletes often file Chapter 11. Real estate investors also find it handy since it allows assets to be written down.

For instance, if you own a property worth $98,000 but owe $150,000 on the loan, you can reduce the principle balance of the mortgage to the value of the property. So your new mortgage number would be $98,000.

Chapter 11 also allows you to reduce the interest rate and extend repayment terms. That would mean lower monthly payments.

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Do Chapter 11 Bankruptcies Work

Not usually. Studies vary, but the success rate is probably 10% to 15%. The low statistics are not surprising considering business are already in deep financial stress and a Chapter 11 is the last-gasp effort to keep operating.

What you need is a lot of determination, a good lawyer and fair amount of luck. Though the best strategy is to avoid bankruptcy regardless of what Chapter is filed.

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