Will Creditors You Went Bankrupt on Consider You Again

February. three, 2009

What Every Investor Should Know ...

Corporate Defalcation

What happens when a public visitor files for protection under the federal defalcation laws? Who protects the interests of investors? Do the old securities have any value when, and if, the company is reorganized? We hope this data answers these and other frequently asked questions about the lengthy and sometimes uncertain bankruptcy process.

What Happens to the Visitor?

How Are Assets Divided in Bankruptcy?

1. Secured Creditors - ofttimes a depository financial institution, is paid first.
2. Unsecured Creditors - such every bit banks, suppliers, and bondholders, accept the next claim.
3. Stockholders - owners of the company, have the concluding claim on avails and may non receive anything if the Secured and Unsecured Creditors' claims are non fully repaid.

Federal bankruptcy laws govern how companies get out of business or recover from crippling debt. A bankrupt company, the "debtor," might apply Chapter xi of the Bankruptcy Code to "reorganize" its business and attempt to become assisting once again. Direction continues to run the day-to-day business operations merely all meaning business concern decisions must be approved past a bankruptcy court.

Nether Chapter 7, the visitor stops all operations and goes completely out of business organization. A trustee is appointed to "liquidate" (sell) the company's avails and the money is used to pay off the debt, which may include debts to creditors and investors.

The investors who have the least risk are paid first. For example, secured creditors take less chance considering the credit that they extend is normally backed by collateral, such equally a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.

Bondholders have a greater potential for recovering their losses than stockholders, considering bonds represent the debt of the visitor and the company has agreed to pay bondholders involvement and to return their primary. Stockholders own the company, and take greater hazard. They could make more coin if the company does well, merely they could lose coin if the visitor does poorly. The owners are concluding in line to be repaid if the company fails. Bankruptcy laws make up one's mind the order of payment.

What Will Happen to My Stock or Bond?

A company's securities may continue to merchandise fifty-fifty afterwards the visitor has filed for bankruptcy nether Chapter 11. In well-nigh instances, companies that file nether Chapter 11 of the Bankruptcy Code are generally unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange. Still, even when a company is delisted from one of these major stock exchanges, their shares may continue to trade on either the OTCBB or the Pink Sheets. At that place is no federal police force that prohibits trading of securities of companies in defalcation.

Note: Investors should be cautious when ownership common stock of companies in Chapter 11 defalcation. It is extremely risky and is likely to atomic number 82 to financial loss. Although a company may emerge from bankruptcy equally a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company's program of reorganization will abolish the existing disinterestedness shares. This happens in bankruptcy cases considering secured and unsecured creditors are paid from the company'southward avails earlier common stockholders. And in situations where shareholders exercise participate in the program, their shares are usually subject to substantial dilution.

If the company does come out of bankruptcy, there may exist two different types of common stock, with different ticker symbols, trading for the same company. Ane is the old common stock (the stock that was on the market when the visitor went into bankruptcy), and the 2d is the new mutual stock that the company issued as part of its reorganization plan. If the old common stock is traded on the OTCBB or on the Pink Sheets, it will have a five-letter ticker symbol that ends in "Q," indicating that the stock was involved with bankruptcy proceedings. The ticker symbol for the new common stock will not cease in "Q". Sometimes the new stock may not have been issued by the company, although it has been authorized. In that situation, the stock is said to exist trading "when issued," which is shorthand for "when, as, and if issued." The ticker symbol of stock that is trading "when issued" will end with a "5". One time the company actually issues the newly authorized stock, the "V" volition no longer appear at the end of the ticker symbol. Be certain you lot know which shares you are purchasing, considering the quondam shares that were issued before the company filed for bankruptcy may exist worthless if the visitor has emerged from defalcation and has issued new mutual stock.

During defalcation, bondholders volition cease receiving interest and principal payments, and stockholders volition stop receiving dividends. If you lot are a bondholder, you lot may receive new stock in exchange for your bonds, new bonds, or a combination of stock and bonds. If you are a stockholder, the trustee may ask you lot to transport dorsum your former stock in commutation for new shares in the reorganized company. The new shares may be fewer in number and may exist worth less than your sometime shares. The reorganization plan will spell out your rights as an investor, and what yous tin can expect to receive, if annihilation, from the company.

The bankruptcy courtroom may decide that stockholders don't get anything because the debtor is insolvent. (A debtor's solvency is determined past the difference between the value of its assets and its liabilities.) If the company's liabilities are greater than its avails, your stock may be worthless. Contact your local Internal Revenue Service (IRS) office or call i-800-829-1040 for information virtually how to written report worthless securities as a loss on your income tax return. If you don't know whether your stock has value, and yous can't find a stock or bond price in the paper, ask your broker or the visitor for information.

Why Would a Company Cull Chapter 11?

"Prepackaged Defalcation Plans"

Sometimes companies set up a reorganization plan that is negotiated and voted on by creditors and stockholders before they actually file for bankruptcy. This shortens and simplifies the process, saving the company coin. For case, Resorts International and TWA used this method.

If prepackaged plans involve an offer to sell a security, they may have to exist registered with the SEC. You will go a prospectus and a ballot, and it's important to vote if you want to take any impact on the process. Under the Bankruptcy Code, two-thirds of the stockholders who vote must have the program before it tin exist implemented, and dissenters will accept to go forth with the majority.

Nigh publicly-held companies will file nether Chapter xi rather than Affiliate 7 because they can however run their concern and control the bankruptcy process. Chapter 11 provides a process for rehabilitating the company's unpleasing business organization. Sometimes the company successfully works out a plan to return to profitability; sometimes, in the stop, information technology liquidates. Under a Chapter 11 reorganization, a company ordinarily keeps doing business and its stock and bonds may go on to trade in our securities markets. Since they however trade, the company must go on to file SEC reports with information about significant developments. For instance, when a company declares bankruptcy, or has other meaning corporate changes, they must written report it within 15 days on the SEC'southward Form 8-K.

How Does Chapter 11 Work?

The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to stand for the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt. The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders vote to pass up the plan, the court tin can disregard the vote and still ostend the plan if information technology finds that the plan treats creditors and stockholders adequately. Once the programme is confirmed, another more detailed report must be filed with the SEC on Form 8-K. This report must comprise a summary of the program, merely sometimes a copy of the consummate program is attached.

Who Develops the Reorganization Programme for the Company?

Committees of creditors and stockholders negotiate a plan with the company to relieve the company from repaying part of its debt then that the company tin effort to get back on its anxiety.

• 1 commission that must exist formed is called the "official committee of unsecured creditors." They stand for all unsecured creditors, including bondholders. The "indenture trustee," often a depository financial institution hired past the company when information technology originally issued a bond, may sit on the committee.
• An additional official committee may sometimes exist appointed to represent stockholders.
• The U.South. Trustee may appoint another committee to stand for a distinct class of creditors, such as secured creditors, employees or subordinated bondholders.

After the committees work with the company to develop a program, the bankruptcy court must notice that it legally complies with the Defalcation Code earlier the plan can exist implemented. This process is known every bit plan confirmation and is usually completed in a few months.

Steps in Development of the Plan:

• The debtor company develops a plan with committees.
• Company prepares a disclosure statement and reorganization program and files it with the courtroom.
• SEC reviews the disclosure statement to be sure information technology's consummate.
• Creditors (and sometimes the stockholders) vote on the plan.
• Court confirms the program, and
• Company carries out the plan past distributing the securities or payments called for by the plan.

What is the Role of the U.S. Securities & Exchange Commission in Affiliate eleven Bankruptcies?

Generally, the SEC'southward function is limited. The SEC will:

• review the disclosure document to determine if the company is telling investors and creditors the of import information they need to know; and
• ensure that stockholders are represented by an official commission, if appropriate.

Although the SEC does non negotiate the economic terms of reorganization plans, we may take a position on important legal bug that will bear upon the rights of public investors in other defalcation cases too. For case, the SEC may step in if nosotros believe that the company's officers and directors are using the defalcation laws to shield themselves from lawsuits for securities fraud.

How Will I Know What'south Going On?

Sometimes, y'all may first learn about a bankruptcy in the news. If yous hold stock or bonds in street name with a banker, your broker should forward information from the company to you lot. If you lot concord a stock or bond in your ain name, you should receive information directly from the company.

You lot may exist asked to vote on the plan of reorganization, although you may not get the total value of your investment back. In fact, sometimes stockholders don't get anything back, and they don't get to vote on the plan.

Before you vote, yous should receive from the company:

• a re-create of the reorganization plan or a summary;
• a court canonical disclosure statement which includes information to help you make an informed judgment about the plan;
• a election to vote on the plan; and
• notice of the engagement, if any, for a hearing on the court's confirmation of the plan, including the deadline for filing objections.

Even when stockholders do non vote, they should become a summary of the disclosure statement, and a discover on how to file an objection to the program.

Stockholders may as well receive other notices unrelated to the program of reorganization, such equally a notice of a hearing on the proposed sale of the debtor'due south assets, or notice of a hearing if the company converts to a Affiliate 7 defalcation.

What is Chapter 7 Defalcation?

Some companies are so far in debt or have other problems and so serious that they can't keep their business operations. They are likely to "liquidate" and file under Chapter 7. Their assets are sold for cash by a court appointed trustee. Authoritative and legal expenses are paid kickoff, and the remainder goes to creditors. Secured creditors will have their collateral returned to them. If the value of the collateral is not sufficient to repay them in full, they will be grouped with other unsecured creditors for the rest of their claim. Bondholders, and other unsecured creditors, volition be notified of the Chapter seven, and should file a claim in instance there's money left for them to receive a payment.

Stockholders exercise not have to exist notified of the Chapter 7 case because they generally don't receive annihilation in render for their investment. Merely, in the unlikely consequence that creditors are paid in full, stockholders will be notified and given an opportunity to file claims.

Does My Stock or Bond Accept Any Value?

Usually, the stock of a Chapter 7 visitor is worthless and y'all accept lost the money you invested.

If you hold a bail, y'all might but receive a fraction of its face value. It will depend on the amount of avails available for distribution and where your debt ranks in the priority listing on the showtime page. If your bail is secured by collateral, your payment volition depend in large part on the value of the collateral.

Where Can I Find More Information?

The Visitor. - Contact the investor relations section in the company'south home office. They tin give y'all more information on the bankruptcy proceeding, including the proper noun, accost, and phone number of the courtroom handling the defalcation.

Your Broker. - If you can't find data in the newspaper or the library, or y'all haven't received whatever correspondence from the company, call the person who sold yous the investment.

The SEC. - Companies file regular reports with the SEC in a calculator database known every bit EDGAR. For example, a company declaring defalcation will file a form 8-Grand that tells where the case is pending and which chapter of bankruptcy was filed. Yous can access EDGAR through your figurer at: http://www.sec.gov If yous don't have access to a computer, your public library may have a computer you can use. You can also request a copy of Course 8-Thou, or whatsoever other reports that the company files with the SEC, encounter "How to Asking Public Documents". You might also be able to get copies of SEC filings from your full-service stockbroker, or the company itself.

Defalcation Courtroom. - If the visitor is in Chapter 7, and has non filed reports with the SEC, or you need more data, the bankruptcy court itself is another source. This court is usually located where the company has its chief place of business or where the company is incorporated. (In that location is at least 1 bankruptcy courtroom in each country and the District of Columbia.) One time you know a company'south main place of business or state of incorporation, you can obtain the address and phone number of the bankruptcy court for that region by visiting the website of the Office of the United States Courts or past calling (202) 502-1900. Court addresses and phone numbers are also listed in the publication, The American Demote, which you lot can observe at your local library. In addition, you'll notice links to U.South. Bankruptcy Court websites at www.uscourts.gov/services-forms/bankruptcy.

U.S. Trustee at the Department of Justice. - The U.S. Trustee has broad administrative responsibilities in bankruptcy cases. Cheque the U.S. Trustee'south website, your local telephone book, or the public library for the field office closest to you, and contact them for information on the status of the bankruptcy.

A Securities or Bankruptcy Attorney. - You lot may want to talk to an attorney, specially if you believe that the debtor defrauded you and yous desire to know your legal options. If you suspect fraud, you should as well report it to the SEC or your state securities regulator.

For a more detailed discussion of unlike types of defalcation, please read Bankruptcy Basics, which the Bankruptcy Partition of the Administrative Office of the United States Courts produced to aid the public in understanding bankruptcy.

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Source: https://www.sec.gov/reportspubs/investor-publications/investorpubsbankrupthtm.html

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