Filing for protection under the federal bankruptcy laws can help companies make plans to repay their debts. A bankrupt company might use Chapter 11 of the Bankruptcy Code to reorganize its business and try to become profitable again. During the period of the bankruptcy proceeding, management may continue to run the day-to-day business operations but significant business decisions generally must be approved by a bankruptcy court. While a company that emerges from Chapter 11 bankruptcy protection may resume some or all of its former operations, it may do so with a new group of investors. Common shareholders frequently are replaced by new shareholders as part of the bankruptcy plan.
Under Chapter 7 of the Bankruptcy Code, the company stops all operations and goes completely out of business. A trustee is appointed to liquidate or sell the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors.
In most bankruptcy cases, the role of the SEC is limited. In certain cases, the SEC will review the company’s disclosure statement and plan, focusing on the treatment of shareholders and the issuance of any securities.
Although the SEC does not negotiate the economic terms of reorganization plans, it may take a position on important legal issues that will affect the rights of investors in other bankruptcy cases as well. For example, the SEC may step in if it believes that the company's officers and directors are using the bankruptcy laws to shield themselves from lawsuits for securities fraud.
You can obtain more information by reading the Bankruptcy Judges Division’s Public Information Series pamphlet on Bankruptcy Basics.