South Florida Arbitration & Litigation Lawyer Blog
Secured vs. Unsecured Corporate and Municipal Bonds – What happens if a company goes into bankruptcy? South Florida FINRA Arbitration and Litigation Attorney – You may be able to recover your investment losses.
If a company defaults on its bonds and goes bankrupt, bondholders will have a claim on the company’s assets and cash flows. The bond’s terms determine the bond-holder’s place in line, or the priority of the claim. Priority will be based on whether the bond is, for example, a secured bond, a senior unsecured bond or a junior unsecured (or subordinated) bond. In the case of a secured bond, the company pledges specific collateral-such as property, equipment, or other assets that the company owns-as security for the bond. If the company defaults, holders of secured bonds will have a legal right to foreclose on the collateral to satisfy their claims. Bonds that have no collateral pledged to them are unsecured and may be called debentures. Debentures have a general claim on the company’s assets and cash flows. They may be classified as either senior or junior (subordinated) debentures. If the company defaults, holders of senior debentures will have a higher priority claim on the company’s assets and cash flows than holders of junior debentures. Bondholders, however, are usually not the company’s only creditors. The company may also owe money to banks, suppliers, customers, pensioners, and others, some of whom may have equal or higher claims than certain bond holders. Sorting through the competing claims of creditors is a complex process that unfolds in bankruptcy court.
However, investors usually purchase and sell corporate and municipal bonds through securities broker/dealers. Under certain circumstances, investments losses suffered by investors, in these types of bonds, may be recoverable from the brokerage firm. Therefore, it is important for the reader to consult with a qualified professional.
Also, please keep in mind that this post is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. Again, if the reader has any questions concerning the contents of this post, you should consult with a qualified professional.
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