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Whats The Difference Between Chapter 11 and Chapter 13 Bankruptcy

By Jason Markum

The stock market… oh the stock market! Investing in the stock market is never easy, let’s face it it can be one of the hardest things in the world. And it can get much more complicated when a company that you have invested in suddenly declares that it’s having financial troubles that may lead it down the path to bankruptcy.

As somebody who’s invested in a company that is contemplating bankruptcy, you may be confused as to what your options are. There is much to consider and several actions that you can take and I’m going to talk about them in this article today.

First things first, let’s talk about the different forms of bankruptcy. For the most part the company will either declare chapter 7 or Chapter 13 (which are basically the same thing), or they will declare Chapter 11 bankruptcy depending on a number of scenarios and of course on their current cash position and future financial viability.

So what’s the difference between Chapter 11 and Chapter 13 bankruptcy?

Chapter 13 bankruptcy (and from here on out I’m just going to refer to Chapter 13 and Chapter 7 as the same thing) means that a company is going to be liquidated, all of their assets are going to be sold, and the company will no longer operate as a viable public entity in any form. We’re talking oblivion here, complete and utter destruction.

The purpose of Chapter 13 is to sell everything in a company that can be sold and then to take that money and pay back creditors as much is possible. Unfortunately for you, shareholders are not considered creditors and are way down the food chain in the pecking order of who gets paid back.

For the most part bondholders will be paid off first, followed by creditors of the company including banks and suppliers and things of that nature. If all those people get paid off and there’s still money left over, it can go to the shareholders… but don’t hold your breath as I’ve never heard of any company who went through Chapter 13 bankruptcy that actually had money left over afterwords to pay back shareholders.

Usually there’s not enough money to pay back even the bondholders.

Chapter 11, on the other hand means that the company is going to be re-organized through bankruptcy court under any number of different fashions and will most likely continue on as a public entity in some form or another.

In Chapter 11 bankruptcy, it is possible for shareholders to hold out through bankruptcy. After the company has been reorganized through the bankruptcy court then it may be possible for them to get their act back together and continue on as a viable company that makes money. If it does so, you can expect its share price to slowly increase in the future. But the thing about all that is it may take 3 to 5 years or longer for this to happen… if it happens at all.

Without a doubt Chapter 11 bankruptcy is better from the point of view of the shareholders. If you believe a company you have invested in will go down the Chapter 11 bankruptcy path it may be possible to you to hold onto your shares and eventually make some money again.

This involves many risks and a lot of time and you just may not want to mess with it. In which case your best bet is to simply sell the shares and cut your losses.

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