| There are many questions raised when a company | | | | to pay off the debt, which would take account both |
| files for corporate bankruptcy. As an investor, people | | | | the debts to creditors and investors. |
| would like to what happens to the company, who | | | | During a payment, the investors are paid first, due to |
| would look into the interests of investors, and above all, | | | | their risk involvement. Bondholders have an advantage |
| if the old securities have any value left, or is the stock | | | | over stockholders since bonds stand for the debt of |
| is turned into paste paper until the company is | | | | the company and the company has agreed to pay |
| reorganized. | | | | bondholders interest and to return their principal. Where |
| Companies that go out of business or try to recover | | | | as stockholders own the company, and therefore take |
| from crippling debt are governed by federal | | | | on greater risk. On a good day, it is the stockholder |
| bankruptcy laws. A bankrupt company, the "debtor," | | | | who would make more money, but at the same time, |
| can use either Chapter 11 or chapter 7 of the | | | | as the company goes bankrupt, the stockholders bear |
| Bankruptcy Code. | | | | to lose, as owners are last in line to be repaid if the |
| Under Chapter 11, the company is allowed to | | | | company fails. Also remember that under Chapter 11, |
| "reorganize" its business and attempt to develop into a | | | | stockholders are still able to trade the stock, but under |
| profitable corporation. The company still functions on a | | | | Chapter 7 the stock is worthless. |
| day-to-day basis other than the fact that all important | | | | The other creditors are usually secured creditors that |
| business decisions have to be agreed upon by a | | | | have low risk factors since the credit that they extend |
| bankruptcy court. | | | | is usually backed by collateral. Collateral can be the |
| Where as under Chapter 7, the company will stops all | | | | mortgage or other assets of the company. They also |
| it operations and completely shut all its functions. The | | | | stand to be paid first as the company files for |
| court assigns a trustee to "liquidate" (sell) the | | | | corporate bankruptcy. |
| company's assets. The money so collect is then used | | | | |