Bondholders on a Chapter 7 or Chapter 11 bankruptcy?
What exactly happens to the bonds and bondholders of both a Chapter 7 and a Chapter 11 bankruptcy?
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They may or may not get paid depending on if the bonds are secured or the company can generate payment.
In the case of a Chapter 7, the assets of the company will be liquidated and the creditors will be paid in order of the priority of their claim. Bond holders generally come before unsecured creditors, preferred shareholders and common equity shareholders. In the case of a Chapter 11 it depends on the plan of reorganization. In some cases the bond holders have exchanged their position (as lenders to the company) for newly issued equity in the company, becoming the new owners, post reorganization.