When a corporation or partnership declares Chapter 7 in the U.S. bankruptcy courts, it doesn't leave much of a leg for the investor to stand on throughout this process. However, several other bankruptcy procedures aren't as debilitating for the investor.

One of the support systems available to investors is called the Securities Investor Protection Act (SIPA), which created the Securities Investor Protection Corporation (SIPC) in 1970. The SIPC is a nonprofit organization funded by member brokerage firms, and designed to protect securities held by individual brokerages belonging to this organization.

This organization is very specific about what is secured and not secured in SIPA liquidations. Oh, that nasty word again - liquidation is what SIPA is all about, but it's one that takes a slightly different track from a Chapter 7. In this case, the SIPC protects stocks and bonds held by a financially troubled brokerage, but not exactly the same way the FDIC (Federal Deposit Insurance Corporation) would protect our savings at the local bank.

The SIPC insurance coverage on stocks and bonds is not the same as insurance coverage by the FDIC because investments aren't the same as savings. It would be in our best interest to read more about the SIPC at their website. The site is easy, fairly straightforward, and Cora breezed through the little quiz included on their site. Within fifteen minutes, she learned how her investments at BUYandHOLD are protected through the SIPC. They're protected, because BUYandHOLD is a division of Freedom Investments, a member of the SIPC.

In another area of interest: If we decide to invest in municipalities through bonds or other issue, we might want to check state laws regarding possible Chapter 9 filings. The history of Chapter 9 is rather convoluted, and varies by state and even by county. Some issues are valid in Colorado, others are valid in Connecticut, and others are valid in California. No matter what we might invest in through a municipal fund or bond, it's wise to at least become a bit familiar with what might be constituted as a municipality in our area or the area of investment, and what can be protected through filing reorganization through Chapter 9.

Reorganization is mostly a sincere attempt to avoid liquidation of assets and an end to business as usual. Chapter 11 is usually the route most businesses take to avoid liquidation when financial troubles arise. This is not to say that Chapter 11 is a cure-all for a poorly run business. It is, however, a great signal to closely watch a company as they dig out from under a possible ruinous financial situation.

We've seen many large corporate entities suffer through Chapter 11 within the past two years. Some businesses sought government support, and others quietly manage to dig their way out by serious downsizing and whittling away at their resources to increase the bottom line. If we're caught in the investment angle with a company filing Chapter 11, what do we do?

Possibly the best thing to do is follow the company's line of thought as they make their way through the quagmire of bad debt. Many times we might see a complete change of the board, or of the operating CEOs. We might also see a complete revamp of the product lines or service areas and policies. We have three choices if we've already committed our dollars to investment: sell, hold, or buy more. What we do is entirely up to us.

I had a friend who was fond of saying, "No sense throwing good money after bad." In plain English, he meant the best action in a failing industry would be to pull out while the pulling was still good. However, this isn't always the case in the investment of a company filing Chapter 11. The best scenario might be one where we wait to see if the company finds their footing, as some good companies often fall during national economic downturns. What may seem "bad money" today might be the flawless gem next year, especially if they can pick themselves up, dust themselves off, and start all over again.

One possible warning sign is to watch for is a court order requiring a trustee to be involved with company reorganization in Chapter 11. This may mean the company might be suspect with fraud, incompetence, misconduct, or any other mismanagement or irregularity in past business procedures. This may mean a setback in timing the reorganization to best benefit the public relations of the company. PR is important in Chapter 11 - the fast and clean reorganization with a solid plan for the future seems to maintain a better chance of investor interest. This fast and clean reorganization also increases the value of the company's equities because of that investor involvement.

Also watch for wildly fluctuating stock movements when new boards, CEOs, and policies are incorporated in a reorganization plan. If we're already invested, and it seems the company (and the economy) might see a light at the end of the tunnel, it could behoove us to keep the faith and keep investing in this company's equities. A good company turn-around is difficult to manage; however, if done well, the company and our portfolio may see a bright future in the long run.

Once again, I'll repeat the significance of a diversified portfolio. If we sit on one egg and that egg breaks, we're going to be in a tough spot (even if it's a chocolate egg). Don't get me wrong, although diversification is not deemed as protection against bankruptcies it does limit your exposure in a particular investment.

Until next week,
Linda Goin