Question

As a shareholder, would you prefer that the company file for Chapter 11 or Chapter 7? What if you were a bondholder? Why?

Answer 1

Chapter 7 for business is usually not a good choice. It is only for an individual who has considerable personal liability for business debts; chapter 7 is the best choice.

Deciding to file Chapter 11 reorganization is not an easy decision. Each business owner should first exhaust all other options. It's a good idea to get financial and legal advice before taking any action.  Chapter 11 can actually be an effective tool to save a business. In a Chapter 11 case, for example, you can sometimes restructure or consolidate debts and come out of the bankruptcy with a fresh start and a clean balance sheet.  Most publicly-held companies file under Chapter 11 rather than Chapter 7 because current management can continue to run the business and control the bankruptcy process. Chapter 11 is a way to rehabilitate the business. Sometimes the plan returns the business to profitability; other times it ends up liquidating.  In most instances, creditors would rather that businesses not file for bankruptcy since they may then get nothing. But creditors are usually of the mindset that none of them is going to accept a compromise on a debt unless they all do. The threat of filing bankruptcy is sometimes just the leverage a business needs to hold creditors at bay until the business turns around.  

In case of bondholders:

Companies that decide they cannot continue to do business usually file under Chapter 7 bankruptcy protection. In Chapter 7, all assets are liquidated and the proceeds are used to pay administrative and legal expenses, followed by creditors. Collateral is returned to secured creditors, who are grouped with unsecured creditors for the remainder of their claim if the collateral fails to cover the debts. Unsecured creditors, including bondholders, may receive some money if there is any left.