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Tuesday Morning Corporation (NASDAQ:TUES) is taking the Chapter 11 route, in a retail sector beset by online competition and caution among consumers due to economic uncertainty.
A slew of publicly listed companies have filed for Chapter 11 of late, including:
Chapter 11, or reorganization bankruptcy, is relief sought by a corporation or partnership wherein a plan of reorganization is proposed by the company to allow it to pay creditors over time in a bid to keep its business alive.
It takes its name after U.S. bankruptcy code 11, which governs the process.
As opposed to Chapter 11, a Chapter 7 bankruptcy filing does not involve the filing of a repayment plan, but rather allows straight liquidation and settlement of debtors.
The shares and bonds of companies that have filed for Chapter 11 continue to trade on exchanges, as the companies continue to do business. Therefore, the companies are liable to report any significant changes within 15 days on the SEC's Form 8-K.
There's always the risk of the shares losing much of their value due to the negative sentiment generated by the inability of the company to handle its finances. In most cases, they plummet hard so that they become ineligible to trade on main exchanges and are delisted. These companies will then trade over the counter on the OTC Markets.
When listed over the counter, the ticker of a company going through bankruptcy proceedings will be suffixed with "Q." Shareholders are the least protected in the eventuality of a bankruptcy filing and will cease to receive dividends.
See Also: What Happens When A Stock Gets Delisted And How It Impacts Investors
The trustee appointed to run the operations may require the shareholders to surrender their shares in order to be issued shares in the reorganized company. Investment value often sees an erosion.
Bond holders will stop receiving interest or repayments during the proceedings. Since bonds of a company reorganizing its debts will be downgraded to junk status, even if the bond holders choose to sell, it will be at a substantial discount.
After a company emerges from Chapter 11, it usually requires bond holders to exchange their bonds for either stock or bond or a combination of both, depending on what is allowed under the reorganization plan.
In the eventuality of a company being unable to put its financial house in order even with the Chapter 11 process, it may have to file for Chapter 7 or eventual liquidation.