What Happens to the Stock of a Company That Goes Bankrupt?
After you’ve painstakingly done your research on what stocks to buy or which company to invest in, if that company then files for Chapter 11 bankruptcy it can hit you hard, especially in the wallet. Any investment comes with a level of risk, and knowing the entire financial outlook of where you invest your money can help, but what if that is not enough? Where do your options go and what happens to a stock when a company goes bankrupt?
Read: Demand for Gold is Up. Here’s Everything You Need to Know.
What Happens to a Stock When a Company Goes Bankrupt: Quick Take
If a company you invested in files for bankruptcy, here are some critical points to keep in mind as a common stockholder:
With Chapter 11 bankruptcy, the company is asking for a chance to reorganize and recover. If it survives, your shares might remain active if the company decides to let them continue trading. But if it cancels existing shares, yours will be worthless.
With Chapter 7 bankruptcy, the company is closing its doors and your stock will have no value.
Owners of common stock often get nothing when a company enters liquidation because they are the last in line for payment. If a common shareholder is paid, the payment will be based on the proportion of ownership they have in the bankrupt company.
If a company files for Chapter 11 bankruptcy but comes back stronger after some maneuvering, you as a shareholder have the potential to benefit from this turnaround. In this case, the old stock that was canceled could be replaced with new shares.
Bankruptcy Proceedings
The first thing you need to know is that there are different types of bankruptcy in the United States. As an investor, it’s essential to understand the differences. Here’s a quick primer:
Types of Bankruptcy Proceedings
Chapter 11: In this type of bankruptcy, the company seeks court protection from creditors until it files a financial recovery plan. If the plan is accepted, the company can renegotiate debts, cut costs and keep doing business. It can also eventually emerge from bankruptcy and even recover financially.
Chapter 7: This type of bankruptcy means the company has closed for good and intends to sell all of its assets and use the proceeds to pay back creditors.
Chapter 9: This type of bankruptcy is available to financially troubled counties, cities, towns or even countries. Once filed, these larger municipalities can figure out their debts while still providing necessary essentials for residents and organizations.
Chapter 12: This type of bankruptcy has similar guidelines to Chapter 11 but is more designed for fishermen and farmers.
Chapter 13: This type of bankruptcy is where you repay off creditors or unsecured creditors including unsecured debts like medical bills or credit card bills. This is usually done over a period of three to five years.
Chapter 15: This type of bankruptcy involves assets, debts and creditors in multiple countries or jurisdictions. It regulates and coordinates between courts in different countries.
Bankruptcy Isn’t Always the End of the Company…
One common misconception is that filing for bankruptcy is the same as going out of business. In truth, bankruptcy is often a way to stay open.
Chapter 11 bankruptcy usually occurs when a company is shouldering more debt than it can pay off in the course of normal business operations. In many cases, that same company believes it can operate profitably again once it gets its debt load under control. This is in stark contrast to a Chapter 7 bankruptcy filing when the company opts to close its doors and sell off all of its remaining assets.
…But It’s Usually the End for Your Shares
So what happens to a stock when a company goes bankrupt? Unfortunately, bankruptcy usually comes at the cost of your investment. As a shareholder, you’re basically a part owner of the company, meaning you’re also on the hook for the company’s debt.
If a company you own stock in files for bankruptcy, it hands over all decision-making to the bankruptcy court until the company and its creditors can arrive at an acceptable settlement. The court, in turn, prioritizes the debts to determine who gets paid in what order. Secured creditors come first, followed by unsecured creditors. Existing shareholders bring up the rear.
As a shareholder, there could still be some actual value left over for you when the process is completed. Just don’t expect the same value you had when you bought the stock. If a company could pay off all of its debts and still have something substantial left for shareholders, why would it be going into bankruptcy in the first place? Even if you do get something for your shares in the end, it’s not likely to be much.
Trading a Bankrupt Company’s Stock
Although your shares might prove worthless following a bankruptcy, that’s not always the case. A bankrupt company will almost certainly have its shares delisted by the Nasdaq or the NYSE, but the shares might still trade on over-the-counter markets. In this case, shares of a company that has entered bankruptcy will have a “Q” as the final letter in its ticker.
New shares of the stock might also be issued without being authorized by the company. These are usually used to compensate creditors who loaned the company money but won’t be getting it back. Those shares will have a ticker symbol that ends with a “V” to indicate that they are shares involved in bankruptcy and exist “as issued.”
Why would anyone buy stock in a company that’s bankrupt? Turns out, there is a small cadre of speculators who specialize in buying and selling shares of companies in bankruptcy — a risky but potentially lucrative practice.
Final Take To GO
The good news is, just because a company goes bankrupt doesn’t mean it’s been given the kiss of death. Depending on the type of bankruptcy and the company involved, it can still operate and even rebound. In rare cases, it can even keep its stock alive so shareholders aren’t left empty-handed.
FAQ
Here are the answers to some of the most frequently asked questions regarding bankruptcy and stocks.
Do you lose your shares if a company goes bust?
Yes, typically when a company goes bust or files for bankruptcy, the stock loses most to all of its value. Depending on the type of bankruptcy proceedings, the stocks could be delisted from the exchange or have the dividends halted.
Can stocks recover after bankruptcies?
Whether or not a stock can recover after filing for bankruptcy depends on the bankruptcy proceedings. For example, if a company files Chapter 7, it is likely you will lose the entirety of your investment.
What are examples of big companies that have declared bankruptcy?
Hertz filed for bankruptcy protection in May 2020 amid a steep drop in travel during the pandemic, but its shares continued to trade over-the-counter, albeit at a discounted rate. After this point, the stock even got a boost after Hertz announced a plan to exit bankruptcy that would benefit shareholders.
Chesapeake Energy filed for bankruptcy protection in June 2020 after it piled up more than $9 billion in debt amid a rapid decline in oil prices. Its stock was delisted that same month. However, the company continued operating. In May 2021 it reported a first-quarter profit of $295 million in its first earnings call after emerging from bankruptcy three months earlier. Chesapeake's stock resumed trading on Feb. 10 at $43 a share, and had risen above $55 by early June.
Caitlyn Moorhead contributed to the reporting for this article.
This article originally appeared on GOBankingRates.com: What Happens to the Stock of a Company That Goes Bankrupt?
