How Chapter 11 Works

• The basic idea behind Chapter 11 is that the company sets up a repayment plan with its creditors under the supervision of the bankruptcy trustee. The company can also negotiate debt-for-equity swaps with its creditors. For instance, if the company owes a supplier a certain amount of money, it can then give that supplier an equal stake in the company and eliminate its debt. This can often strengthen the financial position of a company and make it possible to continue operating.
  
  

Affecting Stock Price

• When a company files for Chapter 7 bankruptcy, the investor's stock basically will be worthless. Investors will not be able to trade it, and then they might not get anything back out of the company. By contrast, with Chapter 11 bankruptcy, the stock does not become worthless. It may temporarily go through a period where it is down compared to what it was before, but it will not be completely worthless. If you are an investor, you may have to hang on to the stock for the long term to get what you paid for it.
  
  

Suspension of Trading

• In some cases, the U.S. Securities Exchange Commission (SEC) or the stock exchange where the stock is traded will suspend trading while the company is going through bankruptcy proceedings. This happens when the SEC or stock exchange feels like the company is currently unfit to be on the stock exchange. For example, this happened when General Motors filed for Chapter 11 reorganization in 2009. After the company gets everything figured out with its debt situation, it can be re-listed on the stock exchange.
  
  

What to Do

• If you are an investor in the company and you hear that it is filing for Chapter 11 bankruptcy, you can take one of two paths. You can try to sell the stock immediately to someone else or you can sit tight. If you try to sell your stock immediately, it can be difficult to get what the stock is actually worth. During these times, fear tends to take over and drive the stock price further down than what it should be. If you are willing to wait through the bankruptcy process, you can get the original value for your stock and it may eventually exceed the price prior to bankruptcy.