by James Copenhaver, Director of Investment Management,
Wealth Enhancement Group

The high profile bankruptcies of General Motors and Chrysler and intervention by the United States Government have muddied the traditional rules for the repayment of debts and proceeds from liquidation.

The US bankruptcy code covers the treatment of bondholders in the case of bankruptcy. It is important to understand who has priority over the proceeds from a liquidation or reorganization.

In the US, bond holders have priority over stock holders, but within the bond holders, some creditors have priorities over other creditors during a liquidation of the company. The generally accepted order of priority is; Secured Senior Debt, Unsecured Debt, Credit Enhancements and then Equity holders, but this order has not always been upheld in the courts or the SEC in reorganization.

In a reorganization of a corporation, a new company will emerge and the creditors may receive cash, new securities or a combination of both.