Shareholder Rights in Bankruptcy

Bankruptcy could make your stocks worthless.

When a corporation enters any type of bankruptcy it usually means the shareholders are going to lose money on their holdings. What type of shares you hold in a company determines how much, if and when you get reimbursed. Overall, shareholders have few rights in a bankruptcy.

Types

Shareholders' rights depend on what type of bankruptcy a company files. Under Chapter 7, the company dissolves and a court sells off its assets, according to Investopedia. Those with corporate bonds--which have a fixed return--get paid first, while those with equity stock get paid last. In Chapter 11, companies reschedule their debt payments and stockholders retain their normal rights to sell or hold.

Considerations

In a Chapter 11 bankruptcy, shareholders may lose the rights to their stock to creditors, who are paid before stockholders, according to the Securities and Exchange Commission. If a company continues operation after Chapter 11, it may have two stocks--one for the new entity and one for the bankrupt company. Shareholders may hold on to the "old" stock, but it becomes essentially worthless.

Tip

When the bankruptcy company cannot pay back shareholders, you can declare the stocks as a loss on your taxes, according to the SEC.

References

• Investopedia: Overview of Corporate Bankruptcy
• Securities and Exchange Commission: Corporate Bankruptcy