Bankruptcy Effects on Bondholders

Bondholders, like all stakeholders in a company, will be affected when a company files bankruptcy. In bankruptcy, protection is afforded first to secured creditors, then to unsecured creditors, and lastly to shareholders. Bondholders are considered to be unsecured creditors so their interests are more protected than shareholders who are considered to be owners of the company.

Types of Bankruptcy

Companies will file a Chapter 7 bankruptcy, which is liquidation, or a Chapter 11 bankruptcy, which is a corporate reorganization. Under either type, bondholders likely will not receive 100 cents on the dollar.

Considerations

Bondholders who have invested in a company will be given a say in the reorganization plan and may be given an opportunity to vote on a plan. The court can approve the plan even without a unanimous vote.

Sources of Information

Investors learn about corporate bankruptcies through the news, through their brokers, or from the company itself.

Tax Issues

Bondholders might be able to claim an income tax deduction for bonds that lose value and should address the matter with an attorney or accountant.

Warning

When national interests are at stake the government can change the rules. For example, when Chrysler filed bankruptcy, the government forced bondholders to take an unfair deal on their bonds.

References

• Corporate Bankruptcy & Your Investment
• Indiana Pensioners Object to Chrysler Sale