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Chap 11 is supposed to mean the company is reorganizing and creating a plan to pay the debt and continue running the company. They are supposed to negotiate between themselves, creditors, bankruptcy judge, and maybe shareholders (if the latter can organize well enough to create a shareholder committee). For example, Covad had a clear plan going into Chap 11 to pay a certain amount to creditors ($.20/dollar or so, plus some preferred shares) and emerge from bankruptcy with a clean plate. Generally I think bondholders end up receiving a small portion of the principle.


Another alternative that's used is that the company will negotiate to exchange the near worthless bonds for stock in the company emerging from bankruptcy. However, the "pre-bankruptcy" shareholders normally get nothing for their stake in the company.

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