Last week we defined a few chapters in the U.S. Bankruptcy Code. Now, let's see how these chapters affect us as investors in U.S. companies?

We learned chapter 7 is used for complete liquidation of personal, corporate, or business partnership assets. In the business arena, this chapter is used to terminate the corporation or partnership. When we learn a business is filing Chapter 7, it's usually on the same day they close their doors. There could be hints and signs leading up to this extreme measure. The stock may waffle up and down, and there may be rumors about "complete company overhaul" or "we're working on our books." Any of these actions may be an indicator, or they may be sincere attempts to reorganize. There's just no way to tell, and the company surely isn't going to announce a decision to terminate business anytime before they actually cease to operate.

Most likely, the corporation or partnership involved in chapter 7 will close its doors upon the advice of their attorney(s). Then, we - as investors - will receive notice as creditors to this business. Chapter 7 places a 'stay' against all collectors for terminal businesses, and - as long as that stay is in effect - our hands are tied from collecting what we feel is owed us.

We - as unsecured creditors - are unable to hassle corporate executives or make a general nuisance of ourselves to collect what we feel is owed us when a business declares straight bankruptcy. In addition, we cannot initiate any lawsuits, or place telephone calls demanding payment. Chapter 7 grants this protection to corporations and partnerships when they can't pay debts.

An unsecured creditor doesn't have collateral material that was documented to retrieve as repayment for the debt owed. We may have equity, but it's not secure. Secured creditors are those who have property or other items owed to them as collateral for loans made to corporations and partnerships. Unsecured creditors usually wait in the back of the line for payment, if any is left after secured creditors are paid.

If you remember from last week, the court appoints a trustee to the business in the process of filing chapter 7. This trustee is the person we contact with questions. Within forty days after a petition for chapter 7 is filed, we will receive notice of a "meeting of creditors," and it will probably come from the trustee. This notice is important, as we're one of those creditors.

The business (debtor) will appear at this meeting, and we can ask questions regarding financial affairs and property. The trustee will also appear at this meeting, and the debtor must supply documents and answers for anything the trustee requests. Often, we will be allowed to have a proxy stand in for us at the meetings to ask questions and to procure information if we can't attend. The bankruptcy judge will not be in attendance, in order to preserve independent judgment for the actual court date.

The appointed trustee is charged with impartiality. The trustee's main function is to assess the debtor's property, including debts and assets, and to liquidate the non-exempt assets. Exempt assets would be those the debtor can refinance to maintain for personal use. Some states actually have their own laws about what a debtor can exempt from chapter 7 liquidation, so be sure to check their state laws about what can and cannot be made exempt to clear up debts. Most corporations and partnerships may not have the luxury of claiming any exempt materials. Business laws for both business setups often protect the individuals involved in running both the corporation and the partnership, and it also often protects their individual assets.

It could take years for the trustee to liquidate assets, and for secured creditors to feel satisfied with repayment. What does this mean for us as investors? It means - most likely - we can kiss our investment money goodbye.

Possibly, the only recourse is a class-action lawsuit. Often, these suits - if justified - could take even more years to settle. The proof would be in whether the corporation or partnership as an entity actually committed financial criminal acts within their accounting procedures. Even if a person or the corporation or partnership was indicted, one would wonder where the money would come from to pay us off - and how many pennies we would receive on each dollar invested.

Within the past two years, we learned we aren't safe from major corporate bankruptcy. Most corporations try to reorganize through chapter 11 restructuring. This latter move is heartening in that we realize the company intends to keep operating through rough waters. However, there may come a time when we wake up one morning to the realization that what we once prized has gone "poof" and disappeared.

Before a chapter 7 disrupts our lives, it's best to reevaluate our investment procedures. If you're like me, you don't have a lot to invest, and a loss of a couple hundred dollars - let alone a few thousand - would be heartbreaking. My grandmother was fond of saying, "Don't put all your eggs in one basket." However, if you can only afford one egg, you don't have a choice; unless, of course, you divide that egg up into several investment possibilities with a BUYandHOLD investment strategy.

Next week we'll look at chapter 11, and see how we might benefit from this move in the market.

Until then,
Linda Goin