What Is the Difference Between Chapters 7 and 11 Bankruptcy Regarding Stock?
Different types of bankruptcy proceedings impact shareholders of corporations in a variety of ways. Officers of a corporation contemplating bankruptcy for the business enterprise need to understand the manner in which Chapter 7 and Chapter 11 bankruptcy cases impact stocks.
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Types
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A Chapter 7 bankruptcy liquidates and discharges the debt of a business. A Chapter 11 bankruptcy permits a business to reorganize.
Effects
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Through a Chapter 7 bankruptcy, a corporation ceases to exist. The stock of such an entity ends up having no value. A Chapter 11 bankruptcy allows a corporation to reorganize and continue operations. Theoretically, the stock of such a corporation will increase in value following the bankruptcy.
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Time Frame
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When a corporation files a Chapter 7 bankruptcy, the stock likely will have no value at that moment. On the other hand, when a Chapter 11 bankruptcy case commences, the value of the stock actually might see at least a slight increase at that time.
Considerations
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A Chapter 11 reorganization is only possible if the corporation demonstrates an ability to sustain profitable operations if permitted the chance to restructure its debts.
Misconceptions
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The most common misconception associated with a Chapter 7 bankruptcy and stock is that the shareholders will receive compensation through the bankruptcy. In the vast majority of cases, stockholders of corporations in a Chapter 7 bankruptcy receive nothing.
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