Distressed Debt Investing-Chapter 11 Bankruptcy

 
Federal bankruptcy laws govern the use of Chapter 11 filings for companies to reorganize. Distressed debt investors both secured and unsecured creditors become the new owners of the company. The company's plan of reorganization cancels the existing equity shares. If existing shareholders do participate in the plan, their shares are subject to substantial dilution.

 Bondholders of a chapter 11 public company stop receiving interest and receive new bonds or stock or a combination. The plan of reorganization spells out what will be received.

In a Chapter 11 reorganization the U.S. Trustee will appoint one or more committees to represent the interests of creditors and stockholders. These committees work with the company to develop a plan of reorganization to reduce debt and get the company going again or on a sound footing. The plan needs to be accepted by the creditors, bondholders and stockholders and confirmed by the court. If these groups reject the plan, the court can still confirm the plan.

Stephen P. Vlahos

Performance Plus Advisors, Inc.

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