Facing bankruptcy is difficult for business owners as well as for investors and creditors. If you invested in a company that filed bankruptcy the question is - will you ever be able to recover any of that investment?
Will I get my money back?
That depends on the form of your investment. Almost all businesses that file bankruptcy are insolvent * meaning they have more debts than assets. This means that not everyone will be paid the amounts to which they are entitled. Bankruptcy is a process designed to divide the assets among creditors and equity holders in the most equitable way possible. All the interest holders and creditors need to file evidence of their claims that document the reason for their right to distribution from the bankrupt company. For the valid claims, the Bankruptcy Code establishes a hierarchy for payments. At the front of the hierarchy are the secured and priority creditors; they have a good chance of partial recovery while the equity holders might not recover anything.
The secured claims
Secured creditors have the best chance of obtaining substantial recovery in bankruptcy cases. If you are fully secured, you should be paid in full * eventually. If you are under-secured, your secured portion may be paid, and you should recover something because of the unsecured portion of your claim. A secured creditor has the right to foreclose on the asset and sell it to repay the debt. The disputes about the fair market value of real estate or receivables are resolved by the bankruptcy court, usually. More problematic is the valuation of intellectual property - trademarks, patents, copyrights. Settlement usually resolves such disputes.
The unsecured claims
Unsecured creditors include a bond or commercial paper lenders with insufficient collateral or without collateral, trade creditors, employees, personal injury claimants, and other general creditors. Certain unsecured creditors have priority over others. A creditors' committee will typically be appointed to represent the interests of unsecured creditors collectively. Usually, the largest non-insider unsecured creditors are selected, but the US Trustee represents various types of claims, and the appointments are not strictly by size. If you want to be active in the case you can apply to be appointed to the committee.
In most bankruptcy cases equity interests are entirely out of re-payments. Equity holders rarely find it worth participating in the bankruptcy case, with only a few exceptions. If your investments are primarily in equity, you must be prepared for a complete loss in case of a bankruptcy filing, unless you have the intention to buy back the company from its creditors.
Converting chapter 7 in chapter 11
Only in chapter 11 exists the opportunity to cut deals about the priority of claims and interests since chapter 7 liquidations are governed by relatively strict rules of priorities and treatment. If a viable plan is proposed, a case may be converted from chapter 7 to chapter 11 to make the deal possible through a feasible plan. While chapter 7 is a liquidation plan chapter, 11 is a reorganization plan. If you meet the requirements for the conversion, your bankruptcy plan will be converted from chapter 7 to chapter 11 by the court. A notice of conversion will be sent to your creditors. If creditors do not challenge the conversion, then your bankruptcy plan will proceed under the laws and rules of chapter 11.
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