Chapter 7 bankruptcy

Chapter 7 bankruptcy is the liquidation chapter of the US Bankruptcy Code. A company that files under Chapter 7 generally ceases operations, and a court-appointed trustee takes control, sells the assets and distributes the proceeds to creditors according to a fixed order of priority.

How it works

The company (or, in some cases, its creditors) files a petition, and a public company typically discloses it in an 8-K under Item 1.03. An automatic stay stops creditor collection actions. Unlike Chapter 11, management no longer runs the business: the trustee does. The trustee collects and sells assets, investigates transactions that may be clawed back, and pays claims in order: secured creditors from their collateral, then administrative and priority claims, then general unsecured creditors. Equity holders are last.

A company sometimes converts a failed Chapter 11 case into Chapter 7 when a reorganization or sale is no longer viable.

Why it matters for traders

For shareholders, Chapter 7 almost always means a total loss. There is no reorganized company to hold new equity, and asset sales rarely cover all debts. The stock is delisted if it has not been already, and it may keep trading OTC for a time at fractions of a cent before the company stops reporting. Small-cap biotech and early-stage companies that run out of cash are the most common public Chapter 7 filers. A Chapter 7 filing following a going concern warning and failed financing attempts is a typical pattern.

Example

Hypothetical Northwind Batteries (NWBT), a pre-revenue company, fails to close a financing and files for Chapter 7 with $40 million of liabilities and $12 million of assets. The trustee sells its equipment and patents for $10 million, pays secured equipment lenders $8 million, and splits the rest among administrative and unsecured claims. Shareholders receive nothing.

FAQ

Do shareholders get anything in a Chapter 7 bankruptcy?

Very rarely. Shareholders are paid only after every creditor is paid in full, which almost never happens in a liquidation.

Can a company come back after Chapter 7?

Not as an operating business. Chapter 7 ends with the company's assets sold and the entity wound down.