A:

Filing for chapter 11 bankruptcy protection simply means that a company is on the verge of bankruptcy, but believes that it can once again become successful if it is given an opportunity to reorganize its assets, debts and business affairs. Although the chapter 11 reorganization process is complex and expensive, most companies, if given the choice, prefer chapter 11 to other bankruptcy provisions such as chapter 7 and chapter 13, which cease company operations and lead to the total liquidation of assets to creditors. Filing for chapter 11 gives companies one last opportunity to be successful.

While chapter 11 can spare a company from declaring total bankruptcy, the company's bondholders and shareholders are usually in for a rough ride. When a company files for chapter 11 protection, its share value typically drops significantly as investors sell their positions. Furthermore, filing for bankruptcy protection means that the company is in such rough shape that it would probably be delisted from the major exchanges such as the Nasdaq or the New York Stock Exchange and relisted on the pink sheets or the Over-The-Counter Bulletin Board (OTCBB). When a company that is going through bankruptcy proceedings is listed on the pink sheets or OTCBB, the letter "Q" is added to the end of the company's ticker symbol to differentiate it from other companies. For example, if a company with the ticker symbol ABC was placed on the OTCBB due to chapter 11, its new ticker symbol would be ABCQ.

Sometimes after a reorganization, a company will issue new stock that is considered different from the pre-reorganization stock. If this occurs, investors will need to know whether the company has given its shareholders the opportunity to exchange the old stock for new stock, because the old stock will usually be considered useless when the new stock is issued.

Throughout the duration of the reorganization, bondholders will stop receiving coupon payments and/or principal repayments. Furthermore, the company's bonds will also be downgraded to speculative-grade bonds, or junk bonds. Since most investors are wary of buying junk bonds, investors that want to sell their bonds will need to do so at a substantial discount. After the reorganization process and depending on the terms dictated by the debt restructuring plan, the company may require investors to exchange their old bonds for shares and/or new bonds. These new issues of stock and bonds represent the company's attempt to create a more manageable level of debt. (For more on this, see What Is A Corporate Credit Rating? and Junk Bonds: Everything You Need To Know.)

For further reading on this topic, see An Overview Of Corporate Bankruptcy.

RELATED FAQS
  1. What happens to the shares of a company that has been liquidated?

    Learn what happens to a company's shares during Chapter 11 and Chapter 7 bankruptcy proceedings, and understand how much ... Read Answer >>
  2. Does a shareholder lose all of their equity once a Chapter 11 bankruptcy is filed ...

    When a company files for Chapter 11 bankruptcy, the management of the company is still in charge of the daily operations. ... Read Answer >>
  3. What happens when a corporation declares bankruptcy?

    Understand what options are available to corporations under bankruptcy protection, and learn what takes place after bankruptcy ... Read Answer >>
  4. What are the differences between Chapter 7 and Chapter 13 bankruptcy?

    Read about some of the primary differences between a Chapter 7 and Chapter 13 bankruptcy, including who may be ineligible ... Read Answer >>
  5. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
  6. What are the differences between chapter 7 and chapter 11 bankruptcy?

    Chapter 7 bankruptcy is sometimes also called liquidation bankruptcy. Firms experiencing this form of bankruptcy are past ... Read Answer >>
Related Articles
  1. Bonds & Fixed Income

    An Overview Of Corporate Bankruptcy

    If a company files for bankruptcy, stockholders have the most to lose. Find out why.
  2. Professionals

    Consumer Protection Laws

    Consumer Protection Laws
  3. Professionals

    Chapter Five

    In this chapter we look at bonds and interest rates.
  4. Credit & Loans

    File Chapter 7 Bankruptcy

    Chapter 7 is the "liquidation" form of bankruptcy. When people file for Chapter 7, the trustee may sell some of the filer's assets to pay creditors.
  5. Professionals

    Chapter 11 - 15

    Auto Chapter
  6. Professionals

    Chapter 6 - 10

    Auto Chapter
  7. Professionals

    Chapter 11 - 15

    Auto Chapter
  8. Professionals

    Chapter 1 - 2

    Candidates who pass the series 26 exam will have the credentials to supervise investment company and variable contract business . All candidates must have passed either the series 6 or series ...
  9. Professionals

    Chapter 1 - 4

    Auto Chapter
  10. Professionals

    Chapter 9 - 12

    Auto Chapter
RELATED TERMS
  1. Chapter 10

    A type of corporate bankruptcy filing in the U.S. Chapter 10 ...
  2. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  3. Wage Earner Plan (Chapter 13 Bankruptcy)

    Also known as a Chapter 13 bankruptcy, this enables individuals ...
  4. Bankruptcy Abuse Prevention And Consumer Protection Act - BAPCPA

    Legislation enacted by President George W. Bush in 2005 that ...
  5. Chapter 13

    A U.S. bankruptcy proceeding in which the debtor undertakes a ...
  6. Chapter 15

    A chapter under the U.S. Bankruptcy Code, added to foster a cooperative ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center