What happens to unsecured debt typically when a company files for Chapter 11 bankruptcy?

When a company files for Chapter 11 bankruptcy, the treatment of unsecured debt is an important aspect of the restructuring process. Typically, unsecured debt, which includes loans and obligations that are not backed by collateral, usually stops accruing interest once the bankruptcy filing occurs. This is because, during Chapter 11 proceedings, the court often imposes an automatic stay, which halts all collection activities.

The intention of this provision is to allow the company some breathing room to reorganize its debts without the burden of accumulating interest during the reorganization phase. This is beneficial for the company because it can help stabilize its financial situation and prioritize restructuring strategies without the added pressure of escalating unpaid interest.

The other options do not accurately reflect standard practice in Chapter 11 cases. For instance, unsecured debt is not typically paid in full immediately, nor is it automatically converted to equity in the company. The accrual of interest at the same rate would also be inconsistent with the typical objective of a company seeking to facilitate a smoother bankruptcy reorganization process without the pressure of increasing liabilities. Hence, stopping the accrual of interest makes sense in the context of allowing a company to manage its financial restructuring effectively.