When a company files for bankruptcy, it means that it is unable to pay its debts and is seeking legal protection from its creditors. The type of bankruptcy that a company files for depends on its financial situation and goals. Here are some possible outcomes when a company files for bankruptcy:
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Chapter 7: If a company files for Chapter 7 bankruptcy, it is likely to "liquidate" and cease operations. A court-appointed trustee will sell the companys assets for cash, and the proceeds will be used to pay off its debts.
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Chapter 11: If a company files for Chapter 11 bankruptcy, it is seeking to "reorganize" its business and become profitable again. Management continues to run the day-to-day operations, but all significant business decisions must be approved by a bankruptcy court. Sometimes the company successfully works out a plan to return to profitability; sometimes, in the end, it liquidates.
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Trading of stocks and bonds: When a company files for bankruptcy, its stocks and bonds usually continue trading, albeit at extremely low prices. However, trading in the shares of a company under bankruptcy protection is incredibly risky and could result in the loss of the entire investment.
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Employees: If a company files for Chapter 7 liquidation, it no longer intends to operate its business. The assets will be sold to pay off the creditors, and all employees can expect to lose their jobs once this process is complete and the company is disbanded. If a company files for Chapter 11 reorganization, it still intends to operate, and employees can expect to continue receiving paychecks. However, the situation can get trickier if an employee is laid off before or after the bankruptcy petition was filed.
In summary, when a company files for bankruptcy, it can either liquidate or reorganize its business. The type of bankruptcy that a company files for depends on its financial situation and goals. Trading in the shares of a company under bankruptcy protection is incredibly risky, and employees may lose their jobs if the company files for Chapter 7 liquidation.
