Posted by Matthew Maillet
When a public company files for bankruptcy, there are many mechanisms put in place by the government that protect the interest of the company’s investors. It is first important to understand the different levels of investor protection. Depending on the type of creditor, there are stipulations that decide whom has the right to make a claim on the remaining company assets.
Secured creditors are obviously the first interest of the company asset distribution. Typically, the secured creditors of a public company are banks. Regardless of the institution of the secured creditors, they are always paid first. Unsecured creditors on the other hand are the second claim on company assets. Unsecured creditors are typically banks, suppliers, and bondholders. The third level of claims comes from the company stockholders. The stockholders have ownership in the company and are only repaid if both the secured and unsecured creditors have been fully repaid. Thus, this is the riskiest level of company investment because there is no actual guarantee on your investment.
Companies that file for Chapter 11 bankruptcy are interested in restructuring the structure of the existing business. The overall goal in Chapter 11 is to find a restructuring plan that makes the company profitable in the future. Once a company files the bankruptcy plan, all major business decisions are decided upon by the bankruptcy court in place. However, marginal day-to-day decisions are still in the hands of the existing company management.
Chapter 7 bankruptcy on the other hand is when a company decides to completely end all operations, thus going out of business. In the event of a chapter 7 filing, an assigned trustee is put in place to sell all company assets and pay off company creditors.
When a public company files for bankruptcy, there are many mechanisms put in place by the government that protect the interest of the company’s investors. It is first important to understand the different levels of investor protection. Depending on the type of creditor, there are stipulations that decide whom has the right to make a claim on the remaining company assets.
Secured creditors are obviously the first interest of the company asset distribution. Typically, the secured creditors of a public company are banks. Regardless of the institution of the secured creditors, they are always paid first. Unsecured creditors on the other hand are the second claim on company assets. Unsecured creditors are typically banks, suppliers, and bondholders. The third level of claims comes from the company stockholders. The stockholders have ownership in the company and are only repaid if both the secured and unsecured creditors have been fully repaid. Thus, this is the riskiest level of company investment because there is no actual guarantee on your investment.
Companies that file for Chapter 11 bankruptcy are interested in restructuring the structure of the existing business. The overall goal in Chapter 11 is to find a restructuring plan that makes the company profitable in the future. Once a company files the bankruptcy plan, all major business decisions are decided upon by the bankruptcy court in place. However, marginal day-to-day decisions are still in the hands of the existing company management.
Chapter 7 bankruptcy on the other hand is when a company decides to completely end all operations, thus going out of business. In the event of a chapter 7 filing, an assigned trustee is put in place to sell all company assets and pay off company creditors.
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