Voluntary vs. Involuntary Bankruptcy

Up today, reader Bruce Koopmans, who asks: "What's the difference between voluntary and involuntary bankruptcy? Hvide Marine (HMARQ) a Barron's Roundtable Pick of 1998 (long and wrong) with a book value of near $10 per share, filed for voluntary bankruptcy, but that does not seem to help the shareholders."

Voluntary bankruptcy is when the company itself files for bankruptcy -- usually because its banks and/or other debtholders pull the plug after a company has been in repeated violation of its loan covenants. Involuntary bankruptcy occurs when creditors of the company (debtholders) try to file bankruptcy on behalf of the company. Creditors do this to get the attention of management.

But as George Putnam, editor and publisher of The Turnaround Letter, says, many involuntary bankruptcies end the same way: "Typically, they turn into a voluntary bankruptcy. There are exceptions, of course, but almost always the involuntary will play out this way." He adds, "In the end, if the company does go bankrupt, common stock shareholders are usually left with little or nothing."

Message Center

Memo to the many readers who continue to wonder whether their Boston Chicken (BOSTQ) shares will hold any value after the company is acquired by McDonald's (MCD) (seriously, I'm getting these): No, they won't. Boston Chicken says as much itself. Remember, even if a company is acquired in bankruptcy, bondholders are ahead of stockholders in line for any remaining cash. And among bondholders, some get first dibs over others, depending on how their credit arrangements have been structured.

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