As an investor in a company that is contemplating bankruptcy, you may be unsure of your available options. There is much to consider and several actions you can take, and I will discuss them in today's article.
First and foremost, let's discuss the various types of bankruptcy. The majority of the time, the company will either declare bankruptcy under chapter 7 or chapter 13 (which are essentially the same), or they will declare bankruptcy under chapter 11 based on a variety of circumstances and, of course, their current cash position and future financial viability.
The difference between Chapter 11 and Chapter 13 bankruptcy is as follows.
In Chapter 13 bankruptcy, a company's assets are liquidated, and it ceases to exist as a viable public entity. We are discussing oblivion, total and complete devastation.
The purpose of Chapter 13 is to liquidate as much of a company's assets as feasible in order to repay as many creditors as possible. Unluckily for you, shareholders are not deemed creditors and are far down on the to-be-repaid hierarchy.
The majority of bondholders will be paid first, followed by the company's other creditors, such as banks, suppliers, and others. If all those individuals are paid off and there's still money left over, it can go to the shareholders, but I wouldn't hold your breath, as I've never heard of a company that filed for Chapter 13 bankruptcy and had money left over to repay shareholders.
Typically, there is not enough money to even repay bondholders.
Chapter 11, on the other hand, indicates that the company will be reorganized through the bankruptcy court in a variety of ways and will likely continue as a public entity in some capacity.
In Chapter 11 bankruptcy, it is feasible for shareholders to maintain their claims throughout the process. After the company has been reorganized by the bankruptcy court, it may be possible for them to regain their footing and continue operating as a profitable business. If it does so, you can anticipate a gradual increase in its share price in the future. Nevertheless, it may take three to five years or longer for this to occur, if it occurs at all.
Chapter 11 bankruptcy is without a doubt superior from the perspective of the shareholders. If you believe that a company in which you have invested will file for Chapter 11 bankruptcy, you may be able to hold on to your shares and eventually profit.
This involves a great deal of danger and effort, and you should probably avoid it. In this circumstance, your best option would be to sell the stock and cut your losses.""
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