Bankruptcy
Bankruptcy is a court process that stays creditors and restructures or liquidates claims when a firm cannot meet its obligations as they come due.
Definition
In the US, Chapter 11 reorganizes; Chapter 7 liquidates. Automatic stay, DIP financing, and absolute priority (in theory) order the claims. Equity is an option that is often out of the money.
Why it matters
Recovery, CDS, and basis trades all live on the filing and the plan. Trading a name into bankruptcy without a claim map is tourism.
Case
A retailer files 11, vendors take haircuts, term loan recovers 60, unsecured 15, equity warrants are a lottery. The ‘cheap equity’ after the file was a call option with a strike at the fulcrum.
How to read it
Map the capital stack, liens, and the fulcrum. Price the claim you actually own, not the ticker.