What Happens to the Stock of a Company That Declares Bankruptcy?

Types

• A corporation can pursue one of two types of bankruptcies. When a corporation files a Chapter 7 bankruptcy, it ceases operations. On the other hand, a corporation can pursue a Chapter 11 bankruptcy, which permits it to continue operations, reorganize its affairs and restructure its debts.
  
  

Effects of Chapter 7 Bankruptcy

• The stock of a corporation that files a Chapter 7 bankruptcy no longer is traded. An owner of the stock can no longer sell her holdings because the corporation ceased operations with the filing of a Chapter 7.
  
  The value of a stock is not determined by its marketability. Indeed, there are corporations with issued stock not sold through a stock market. Stock price is determined ultimately by the value of the corporation itself, through a computation of the worth of all its assets.
  
  There is a possibility that the owner of stock in a corporation in Chapter 7 bankruptcy might receive some return on her investment. Once all debts are paid, if any assets remain to be sold or liquidated, the proceeds from such transactions may be paid to shareholders. However, even if a shareholder received anything of value from a corporation in Chapter 7, the payment likely would not allow her to recoup the investment she made in the stock.
  
  

Effects of Chapter 11 Bankruptcy

• Because a company continues to operate in a Chapter 11 bankruptcy, the stock of a corporation so situated maintains at least some value. The financial problems of the corporation will cause the value of the stock to decrease. However, the U.S. Bankruptcy Code and the securities laws of the United States (and individual states) do not prohibit the ongoing buying and selling of stock of a company in Chapter 11, according to the U.S. Securities and Exchange Commission. The goal of a company in Chapter 11 is to develop a more profitable means of operating and a plan to resolve debt issues. Therefore, ultimately a stockholder in such an enterprise may find that his investment gains in value after the Chapter 11 process is completed.
  
  

Misconceptions

• The most common misconception associated with a corporate bankruptcy is that a shareholder always ends up with worthless stock. Certainly, there are instances when this proves to be the case. However, through the Chapter 11 bankruptcy process, corporations do have the ability to overhaul their operations and resolve debt-related issues. They are able to return to a profitable position following their bankruptcy cases.
  
  

Time Frame

• Commercial bankruptcies, particularly Chapter 11 cases, can be prolonged experiences. In other words, shareholders cannot rely on a specific or set schedule in regard to court proceedings and when issues concerning their ownership interests will be resolved.