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Voluntary vs. Involuntary Bankruptcy

Initiating the MonEmailbag and related message boards.

Up today, reader

Bruce Koopmans

, who asks: "What's the difference between voluntary and involuntary bankruptcy?

Hvide Marine




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."

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Memo to the many readers who continue to wonder whether their

Boston Chicken


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TheStreet Recommends

shares will hold any value after the company is acquired by


(MCD) - Get McDonald's Corporation Report

(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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Questions? The question about bankruptcies is the kind of general money-related inquiries this column welcomes and will attempt to answer. Our goal is to have one column, published at the same time, every day. Have a question? Send it to Personal replies cannot be guaranteed.

Herb Greenberg writes daily for Mark Martinez assisted with the writing and reporting of this column. In keeping with TSC's editorial policy, neither owns or shorts individual stocks, though both own stock in They also don't invest in hedge funds or other private investment partnerships. They welcome your feedback at