Company Bankruptcy
A Company bankruptcy is the inability of an organization or company to pay the debts. Generally filing bankruptcy provides the company one advantage to reconstruct the business plan or finally closing company by selling assets and paying remaining debts and bills in liquidation process. According to chapter 7 or 11 of the federal bankruptcy law public companies can file for bankruptcy protection. Chapter 7 states that liquidation of corporation occurs after court determines that company is not in position to pay its debts.
Bankruptcy is one type of legal status of an insolvent person that is not able to repay the debts they owe to creditors. Mostly bankruptcy is imposed by a court order, often initiated by the debtor. Bankruptcy process is not quick. The expected time for bankruptcy may be long. The process is quite expensive too and the cost depends on debt. Sometimes it is better to run a business than filing bankruptcy.
Secured creditors who take less risk are paid first. During bankruptcy bondholders stop receiving interest and stockholders stop receiving dividends. As the stockholders own the company, they are benefited if company is doing well but also lose money when company fails. The company owners are last to be paid. However, order of payment is decided by bankruptcy law. Under chapter 11, company securities can continue trading after filing bankruptcy. Investors should keep in mind when buying stocks of companies under chapter 11 as it is very risky and often lead financial lose.
In most cases, the reorganization plan of company cancels the existing equity shares. This is quite common in bankruptcy as stockholders are paid after secured and unsecured creditors. As owners of the company shareholders do participate in plan and as result their shares are subject of dilution. You may have chance to vote for the plan of reorganization.
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