How to Trade Chapter 11 Bankruptcy Announcements

Chapter 11 filings create extreme volatility — and opportunity — because the market often misprices what bankruptcy actually means. The key is distinguishing between value destruction and value transfer.

When to Go Short

In most cases, common equity is impaired or wiped out in Chapter 11. Shorts tend to work best when:
• The company files with heavy secured debt and little asset coverage
• Management signals a debt-for-equity swap
• Trading halts are lifted and retail speculation pushes shares higher

Post-halt rallies are often driven by misunderstanding, not fundamentals. These spikes are typically short-lived as dilution risk becomes clear.

When to Go Long

Long trades can work — but they are the exception, not the rule. Favor long setups when:
• The filing is “pre-packaged” with lender support
• The company has strong cash flow and a viable core business e.g. Hertz
• The filing removes legacy liabilities rather than operating viability

In these cases, bonds often rally first, followed by equity once survival becomes credible.

Timing Matters

The highest volatility occurs within 24–72 hours of the announcement and again at key court milestones (DIP financing approval, plan confirmation). Liquidity can evaporate quickly — position sizing is critical.

Risk Management

Expect halts, wide spreads, and sudden repricing. Never assume Chapter 11 is binary. Trade the structure, not the headline.

It's Important to note that in Chapter 7 bankruptcy, the company is completely dissolved, not restructued.