Understanding Your Rights: What Happens When a Company Goes Bankrupt?
Witnessing a company you rely on or invested in going bankrupt can be unsettling. However, you must know that even in such a scenario, certain rights protect you, the consumer or investor. This guide will help you understand what to expect and how to act when a company goes bankrupt.
First, What is Bankruptcy?
Bankruptcy is a legal process that happens when a company, individual, or entity cannot repay the debts it owes to creditors. The procedure begins when the debtor or the creditors file a petition in court. While bankruptcy can lead to the dissolution or restructuring of the company, it's crucial to understand your rights and how this situation can affect you.
Your Rights as a Customer
When a company goes under, customers often worry about the products or services they've already paid for. Here are some common concerns that arise and the rights associated with them.
Pre-Purchased Products and Services
Customers who've pre-paid for products or services may understandably feel cheated when the company declares bankruptcy. However, bankruptcy law provides some protection here. Depending on the type of bankruptcy filed, the company may either fulfill its obligations, or the court may deem these pre-paid customers as unsecured creditors, giving them a chance to claim their money in bankruptcy proceedings.
Warranties and Guarantees
Often, companies declare bankruptcy due to financial struggles, rather than a lapse in the quality of their products or services. If you're worried about warranties and guarantees of the products purchased, you must understand that the continuation of these assurances depends on the company's status post-bankruptcy. If they stop operations altogether, the warranties may be null and not honored. If the company continues operations, either independently or under another entity, the warranties are usually kept intact.
Gift Cards
If a company goes bankrupt, it doesn't necessarily mean that you cannot use your gift cards anymore. In some cases, the company will continue to honor gift cards. However, if the company closes down, your gift card may become worthless. In rare cases, the card holders can file a claim in the bankruptcy proceedings. This will be considered a low-priority unsecured debt.
Your Rights as an Investor
Investors face a different set of impacts when a company files bankruptcy. The way one gets affected relies heavily on the type of investment they made in the company.
Stocks
If you own stocks in a company that declares bankruptcy, the picture isn't very rosy. In most cases, stockholders are last in line to receive any leftover assets after the bankruptcy proceedings. This means you may not receive anything if the company's assets are insufficient to pay off its creditors. Existing shares usually are canceled, and if the company continues operations, new stocks are issued.
Bonds
Bondholders are in a better position than stockholders in bankruptcy cases as they're considered creditors to the company. However, there are levels of seniority among the bondholders, and those holding senior bonds will be paid first, followed by junior or subordinated bondholders.
Mutual Funds
If you've invested in a mutual fund that in turn invested in the bankrupt company, your impact will be dictated by how much of the fund's portfolio was invested in the troubled company. Diversified funds, which are legally obliged to restrict the percentage of assets invested in a single issuer, can reduce the impact of a single company's bankruptcy.
What Next? Assessing Your Options
While bankruptcy can be a tough situation, it's not the end of the line. Here's what you can do under these circumstances.
File a Proof of Claim
Whether you're a customer or an investor, you can file a proof of claim in the bankruptcy court if you weren't paid what you were due. The bankruptcy court will provide notice if such a claim is needed. It's advisable to submit your claim, even if you think it may not provide any dividends. Sometimes, there may be more assets than believed initially, which might result in some repayment for you.
Monitor the Proceedings
Bankruptcy cases can drag on for months, even years. It's essential to keep an eye on the proceedings, look out for court notices, and respond appropriately. Staying updated about the situation can help you make informed decisions and take necessary actions.
Get Legal Assistance
Bankruptcy laws are complicated, and without professional assistance, you may find it challenging to navigate through the entire process. Hiring a lawyer can help you understand the proceedings and your rights in a better light. You'd also get guidance in filing claims, if necessary.
Manage Risk
If you're an investor, the bankruptcy of a company can serve as an excellent reminder of the importance of risk management. Investments should be diversified and periodically reviewed to mitigate the risks of bankruptcy and similar circumstances.
Steering through Rough Waters
In the unsettling event of a company going bankrupt, it's crucial to remember that you have rights. As a customer, your pre-purchases, gift cards, warranties, and promises need to be addressed. As an investor, your holdings—be it stocks, bonds, or mutual funds— will be impacted, and you must take action accordingly. Despite the unpleasantness of the situation, with vigilance, patience, legal assistance, and the right understanding of your rights, you can navigate this storm and come out stronger.
