Chapter 11 Bankruptcy

Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. What happens to your investment will depend largely on how the company declares bankruptcy and whether it succeeds in reorganizing its business and becoming profitable again.

If a company declares bankruptcy under Chapter 11 of the Bankruptcy Code, it will attempt to reorganize. In that case, management may continue to run the day-to-day business operations, although the bankruptcy court must approve all significant business decisions. While some Chapter 11 Bankruptcy companies continue to trade during bankruptcy, others do not. If the company ultimately succeeds in reorganizing, you may be able to exchange your old stocks or bonds for stocks or bonds in the new company. But the new securities may be worth less than your original investment -- or the bankruptcy court may determine that stockholders don't get anything because the debtor is insolvent.

A company also can file for bankruptcy under Chapter 7 Bankruptcy if it intends to stop all operations and go completely out of business. The bankruptcy court will then appoint a trustee to liquidate the company's assets to pay off the debt, which may include debts to creditors and investors. But while bondholders sometimes get back a fraction of their investment, the stock of a Chapter 7 Bankruptcy company is generally worthless.

In most bankruptcy cases, the role of the SEC is rather limited.