There are 2 main forms of commercial bankruptcy that are relevant to investors under the Bankruptcy Code: Chapter 7 and 11.
What is Chapter 7?
If a company files for Chapter 7, this means the company stops operations and a trustee is tasked with selling any assets the company owns in order to repay what it can to creditors and investors. In the event you own stock of a company that files Chapter 7 bankruptcy, it will likely become worthless and it is unlikely you will recover any of your investment (see sidebar).
What is Chapter 11?
Under Chapter 11 bankruptcy, there is slightly more hope that the company can survive and your stock will not become worthless. Chapter 11 allows a company to "reorganize" so that it might become profitable once again. Under Chapter 11, management runs the day-to-day business operations, but significant decisions are made by a bankruptcy court. Many of the companies that have declared bankruptcy during the pandemic have filed Chapter 11, in the hopes that economic activity might rebound if COVID-19 infections, hospitalizations, and mortalities abate.
In next blogpost, we will discuss what are your options if a company files bankruptcy.