There are two basic choices available to a business if and when it decides to declare bankruptcy. Chapter 7 and 11 are when a business has hit a financial wall and can no longer stay operational. In filings of this type there is no exit process because the company will cease trading immediately, and investors stand very little chance of recovering their money.
Chapter 11 filing provides a business with an opportunity to restructure itself once it has reorganized its debts, and other aspects of its operation. A Chapter 11 bankruptcy petition also allows the business to continue trading, so that it can generate enough revenue to repay its creditors, and investors.
During the initial stages of a Chapter 11 bankruptcy investors, and other interested parties, should expect the stock value to drop to junk levels for a prolonged period of time. The reason for this is that most investors will bail out, so that creates a run on the company\’s stock i.e. the more investors that dump stock, the more this encourages other investors to take the same steps. The difference here is that because the stock would be delisted as part of the Chapter 11 filing, so the only people trading in these stocks would be doing so “over the counter”.
Chapter 11 bankruptcy filings are complex and take a significant amount of work to process successfully, resulting in many businesses avoiding them unless they have no other choice. Only companies that have a real interest in staying afloat would even consider this type of bankruptcy petition.
As a business exits the NJ bankruptcy process the first major step it takes is to cancel any existing stock, and to issue new stock instead. At this point in the Chapter 11 process the original stock is reduced in value to zero. The primary reason for issuing new, and revalued, stock like this is for the business to repay its creditors – it can’t afford to do that with cash, or other assets, so stock is issued instead.
Most investors will also be given the opportunity to exchange their old stock for new stock, but creditors are always first to be repaid. There is also no guarantee that the new shares will ever be as valuable as the original stock – that’s all down to how the market views the reorganization of the business, and whether or not it’s seen as a worthwhile investment vehicle.
The reality is that only about 10% of companies that file for Chapter 11 ever manage to turn their situation around and become profitable again. The same reasons that drove them to petition for bankruptcy are rarely resolved, which simply buys the company a few extra months in business until the same mistakes are repeated all over again.