When a company files for Chapter 11 bankruptcy, the management of the company is still in charge of the daily operations. That said, significant business decisions, especially those pertaining to debt or debt securities, are sent to the bankruptcy court for approval.

Filing for Chapter 11 Bankruptcy

Obtaining 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 the firm is in Chapter 11, its stock will still have value, but there is a temporary trading freeze. Although the stock will be delisted, over the counter (OTC) trading may still occur. In other words, the equity a broker has invested in the firm is not valued at zero, but their true value cannot be easily determined since the shares are no longer publicly traded. 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.

Filing for Chapter 7 Bankruptcy

Under a Chapter 7 bankruptcy, all assets are sold for cash. That cash is then used to pay off legal and administrative expenses that were incurred during the bankruptcy process.

Once a company proceeds to file for Chapter 7 bankruptcy, the company's creditors are paid in a specific order. Generally, investors or creditors are paid in the following order:

1) Secured creditors
2) Unsecured creditors
3) Shareholders

Usually, little to nothing is leftover for shareholders after the more senior creditors are paid.

What Happens to Equity Values?

When a corporation is on the verge of bankruptcy, its stock value will reflect the risk that a Chapter 11 may become a Chapter 7.

For example, a company traded at $50 may trade at $2 per share due to bankruptcy speculation. If Chapter 11 is actually filed, the stock price may fall to 10 cents. This value is composed of the potential income that shareholders may receive after liquidation and a premium based on the possibility that the firm may restructure and begin to operate successfully in the future. Private investors can buy and sell these 10-cent shares in the OTC market. The actual value does not reach zero unless the probability of restructuring is so low that a Chapter 7 filing is sure to follow.

However, if the company restructures and emerges from Chapter 11 as an improved organization, its share price may rise to higher levels than previously witnessed.

(For more, check out "What are the Differences Between Chapter 7 and Chapter 11 Bankruptcy?")

  1. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
  2. 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 >>
  3. 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 >>
Related Articles
  1. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  2. Taxes

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  3. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  4. Small Business

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  5. Personal Finance

    Should You File for Bankruptcy?

    Find out how to determine whether bankruptcy will help or hurt your financial situation.
  6. Personal Finance

    Life After Bankruptcy

    Find out what you have to look forward to after filing for Chapter 7 or 13.
  7. Small Business

    Not Too Big To Fail: Corporate Financial Struggles

    Even the biggest corporations are not immune to financial failure. Here are five the biggest corporate bankruptcies of the decade.
  8. Investing

    Halcon Resources Exits Bankruptcy Restructure (HK)

    Halcon Resources exits quickly from prepackaged Chapter 11 bankruptcy agreement.
  9. Personal Finance

    Millionaires With The Most Bankruptcies

    These celebrities made a lot and lost a lot - sometimes several times over. Find out who they are.
  1. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  2. Wage Earner Plan (Chapter 13 Bankruptcy)

    Also known as a Chapter 13 bankruptcy, this enables individuals ...
  3. Chapter 7

    A bankruptcy proceeding in which a company stops all operations ...
  4. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  5. Chapter 15

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

    A method for determining whether someone qualifies for a financial-assistance ...
Hot Definitions
  1. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  3. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  4. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
Trading Center