What Will Happen to Common Stock Shares When a Company Comes Out of Chapter 11 Bankrupty?

Creditors are often paid pennies on the dollar when companies seek bankruptcy protection.

A change in a company's business status causes a proliferation of other changes that may or may not be predicted. Bankruptcy is one of these changes. There are two common types of business bankruptcy. Chapter 7 involves liquidation of assets; the business closes and ceases operations. Chapter 11 entails a business reorganization. The company continues operating and works out a plan to emerge from bankruptcy free from debt.

Levels of Financial Obligations

A business files for bankruptcy because it cannot meet its debt obligations. Usually, all creditors do not receive full payment. There is a hierarchy of creditor payment obligations a company in Chapter 11 must abide by. The first level is secured creditors, often banks. The company pledged collateral against these loans. The collateral may be real estate, equipment or investments. The second level is unsecured creditors, including bondholders, vendors and suppliers. Many will settle for a percentage of what is owed. The bottom rung of the payment obligation ladder is common stockholders. In most Chapter 11 bankruptcies, stockholders lose all of their investment. The stockholders cannot receive anything unless all secured and unsecured creditors are paid in full.

Chapter 11 Announcement

Bankrupt companies usually trade over the counter as penny stocks because of low trading prices.

If a company's stock price has not already plummeted before the declaration of bankruptcy, it will once the news is public. In the vast majority of cases, once a company declares Chapter 11, stockholders have lost their investment. The stock continues to trade. A company's finances may preclude the company from maintaining its listing on the NASDAQ or New York Stock Exchange. The stock will continue trading as an Over the Counter Bulletin Board stock, or penny stock. The stock symbol will receive the designated last letter Q, signifying the company is in bankruptcy.

Bankruptcy Proceedings and Trading

Bankruptcy proceedings can drag on for months and sometimes years. During this time the stock continues to trade, usually at very low values. There is an active market in bankrupt issues. Speculators, day traders and short-term investors attempt to make money in these risky stocks.

Emerging From Bankruptcy

A company emerges from bankruptcy when a judge finalizes and agrees to the company's restructuring plans. The company is now a new entity, free from debt, and issues new stock. The old stock is now worthless. Rarely do stockholders receive anything in corporate bankruptcy reorganizations. Occasionally, they may have claim to some of the new stock, but investors will not receive anything close to their original investment in the company.

Selling the Worthless Stock

If an investor holds the old company stock in a retail account, and not a qualified retirement plan, the best thing to do is sell the stock before the company emerges from bankruptcy, or immediately after. Most brokerage firms will take the stock off an investor's hands and send a trade confirmation. If there is no listed trading price, the total value of the stock will be recorded as $1. The investor can capture the investment loss and move on.

References

• Lawyers.com: Business Bankruptcy FAQ
• Securities and Exchange Commission: Corporate Bankruptcy