How to Recover Money From a Corporation Bankruptcy

It's possible to recover an investment in a corporation that goes bankrupt.

A corporation usually files for bankruptcy under one of two sections of the bankruptcy code -- Chapter 7 or Chapter 11. A Chapter 7 bankruptcy is a liquidation, where usually the company goes out of business and sells off all of its assets. A Chapter 11 bankruptcy is a reorganization that allows the company to continue to operate while obtaining relief from some of its debts. In both types of bankruptcy, creditors recover their investment first, followed by shareholders.

Instructions

1. Find out if the corporation filed a Chapter 7 bankruptcy. Skip this step if the corporation filed a Chapter 11 bankruptcy. In a Chapter 7 bankruptcy, the company sells off its assets and with the money collected from the sales pays off its creditors and investors. Creditors and investors are paid off in the following order: secured creditors, unsecured creditors and shareholders. Secured and unsecured creditors are notified by the company of the bankruptcy and given information on how to file a claim. Shareholders are usually not notified of a Chapter 7 bankruptcy filing because it's expected that their investment amount will most likely not be returned.

2. Determine if the corporation filed a Chapter 11 bankruptcy. Skip this step if the corporation filed a Chapter 7 bankruptcy. A Chapter 11 bankruptcy is a more complex endeavor since the company is expected to continue operations and the bankruptcy filing is a way for the company to eliminate some of its debt. At the time of the filing, a trustee is appointed to represent the creditors and investors in developing a reorganization plan for the company. Creditors and investors receive documentation for their review relating to the reorganization and instructions on how to vote on the plan.

3. Note whether you are a creditor or a shareholder. If you are a secured creditor, you have a good probability of recovering the amounts owed to you by the company. Secured creditors are first in line to have a claim against the company's assets since their debt is usually supported by collateral. If you are an unsecured creditor, you will receive your share of assets after the secured creditors are paid. A bondholder, for example, is a type of unsecured creditor with a good likelihood of recovering his investment. Shareholders are the last group to receive any remaining claim on assets after creditors are paid off. Usually shareholders do not recover any of their investment, especially if creditors are not paid off in full.

4. Consult with outside sources for additional information on the bankruptcy. Sources of information include the company, your investment adviser, the Securities and Exchange Commission (SEC) and the bankruptcy court. The SEC has a website (sec.gov/edgar) that gives access to company filings of SEC-required reports, such as an 8-K, which details a company's reorganization plan under Chapter 11.

References

• "Regulation: CPA Exam Review"; DeVry/Becker Educational Development Corp.; 2009
• Securities and Exchange Commission; Corporate Bankruptcy; February 2009