Bankruptcy Questions Answered

5 Responses to “What happen to shareholders when a company file Chapter 11 Bankruptcy? ?”

1. By vorro on Nov 28, 2009

   They all go to jail.

2. By jeffsmoker on Dec 1, 2009

   The stock is basically worthless. They might reorganize the company and when that is done, they issue new stock. Stockholders are probably trying to get rid of them.

3. By Mark L on Dec 2, 2009

   Usually the shareholders get wiped out in a bankruptcy. Chapter 11 of the bankruptcy code is a reorganization. The company submits a plan to the bankruptcy court which tells how its creditors will get repaid. Most of the time, the creditors (debtholders) are given equity (stock) in the new reorganized company and the former stockholders” stock becomes worthless. On rare occassions, the former stockholders are given warrants or retain their common stock. It all depends how much debt the bankrupt company has and what level of new debt it can support.

   The common stock can continue to trade on the stock exchange until the bankruptcy plan is approved by the company’s creditors. This can take several months. Sometimes a Chapter 11 plan is converted into a chapter 7 liquidation if the creditors believe that they will get more money from selling off the company’s assets than if the company was reorganized and continues in business. In these rare case, if the company’s assets are worth more than its debts, the remainder of any amounts would be payable to the stockholders (after the debt is paid, next would come preferred stockholders, then common stockholders); however, if the assets were worth more than the debts, the company probably would not have had to declare bankruptcy in the first place. In most cases, there is not enough money to pay stockholders. Remember that all of the company’s advisors (its lawyers and accountants and investment banks get paid first, even before the creditors)

   You should avoid buying stocks of bankrupt companies unless you have a deep understanding of the company’s reorganization plan. If you own stock of a bankrupt company, you should try to sell it if the price ever rises. It may be your last chance to recover something. If you stlll believe in the reorganized company’s business prospects, you can always buy shares of the new reorganized company after it emerges from bankruptcy. When the company reorganizes, it usually issues stock to the former debtholders and they usually sell it as soon as this new common stock starts trading. You can sometimes buy this new common stock cheap when they sell. If the business works, the company should be more competitive after all of its debt is wiped away, but be careful if the company loads itself up with debt again (like the airlines).

4. By betmoneyonit2 on Dec 5, 2009

   Ask Kmart shareholders. If you hold common stock what happens is that you are the last on the list of debtors to be compensated. What usually happens is that when the company comes out of bankruptcy the common shareholders lose everything they have.

5. By roman g on Dec 6, 2009

   WAMUQ ALL THE WAY