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What happens to stock after Chapter 7 bankruptcy?

If you were running a public company in Ohio, you would probably be a major stockholder. A bankruptcy you used to get relief from organizational debt would typically take one of two courses: restructuring or liquidation. The second type, liquidation, is covered under Chapter 7 of the bankruptcy code. 

You may not have to think too much about securities if you are considering declaring debt restructuring or forgiveness for your business. After all, the vast majority of US businesses are small and privately held. However, this discussion could be useful to you if you were considering turning to the public for a new source of capital. As you will see, the privileges of stock ownership often come with a certain amount of risk.

Furthermore, there are many ways you might want to liquidate before you tried a debt relief solution that is as formal as bankruptcy. Opening a line of credit to ease cash flow issues, selling non-essential assets and restructuring are all potential debt management strategies. That said, the process is a good way to move on from an unsuccessful high-risk venture or to reorganize and focus on primary practices.

As explained by the SEC, bond investors and creditors typically have priority over stockholders during Chapter 7 liquidation. You could consider this risk as a balance to the higher returns that stockholders stand to earn should your company earn higher-than-average profits.

One thing to note is that personal and business bankruptcy are significantly different. Also, for companies with a discreet tax identification number, individual credit of the stockholders should not typically be adversely affected by Chapters 7 or 11. However, each case is different, so please do not view this as legal advice. It is simply an informative article.

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