What to Expect When You Own Bankrupt Stock Shares

Many businesses receive financial backing from investors, bondholders and stockholders in order to gain enough financial support. These investors, bondholders and stockholders then have stake in the company and have some percentage of ownership in the company. However, when things go badly for the company and its finances go downhill, the stockholders and investors are the ones that take the biggest financial loss. Stockholders are subject to even bigger losses than investors and bondholders because they are the last to be paid back. If you find yourself holding shares of stock for a company that has gone bankrupt, it is imperative you understand the rules for bankruptcy stock shares so you can know what to expect. 

Type of Bankruptcy

When a business has no choice but to claim bankruptcy, there are two types of bankruptcy that they can claim. The most common type of bankruptcy claimed by a business or company is called Chapter 11. Chapter 11 bankruptcy is the most common because it allows the company to get rid of its financial debt to its creditors while still maintaining operations. Chapter 11 allows the company to reorganize and continue its business through a reorganization plan that is developed by its stakeholders and investors. 

The company or business can also make the decision to declare Chapter 7 bankruptcy. In this case, the company will no longer be in operation and all of the assets of the company will be liquidated. Creditors are paid back from the financial gains that are obtained from the liquidation of assets.

Stockholders and Chapter 11

If the business you hold stock in declares Chapter 11 bankruptcy, the stockholders are often given the opportunity to reinvest in the company again as the company attempts to get back on its feet. New shares are offered and can be purchased by current stockholders, often in exchange for old shares, so that little financial loss occurs. This reinvestment opportunity, when it is offered, is the best one for stockholders in a company that goes bankrupt under Chapter 11. Of course, this is not always the case and if stockholders are not offered a reinvestment plan, at times the company can be reorganized to make their shares of stock virtually worthless. Typically, preferred shareholders are most protected and are most likely to be given a reinvestment opportunity, while common stock holders may be left with nothing. 

Stockholders and Chapter 7

The worst case scenario for stockholders of a company that goes bankrupt occurs if the business declares Chapter 7 bankruptcy rather than Chapter 11.

• In the case of Chapter 7 bankruptcy creditors, preferred investors and bondholders are paid back from the liquidation of company assets first because these types of investors have been promised to be paid back while stockholders have not been given the same promise. 
• Stockholders will only receive their money from the finances left after repaying these particular types of investors if there is any money left. 
• If there is no money left after paying preferred creditors, stockholders must take a loss on their stocks. Essentially this means that the investors of the company that take the smallest risks are paid back first followed by riskier avenues of investments.

Role of the SEC

SEC stands for the Securities and Exchange Commission. It is the official governing body of the federal government that maintains jurisdiction over companies. Unfortunately for investors, the SEC’s role in the proceedings of company bankruptcy is limited to say the least.

• The SEC is permitted to look over and examine official documentation in order to make sure the company is being honest and truthful in their disclosures to creditors, investors and stockholders and to make sure that stockholders are being represented fairly in the proceedings when it is appropriate. 
• The SEC also has the ability to step in during Chapter 11 reorganization plans in order to ensure that management is being honest. For example, the SEC makes sure that the bankruptcy was necessary and there was no other choice for management other than to declare bankruptcy.

This, however, provides little comfort for a shareholder of a company who is left with nothing when the company goes bankrupt. 

Getting Legal Help

If you own shares of a bankrupt company, you may wish to speak with a lawyer. Your attorney can help you to determine what claims you have based on your ownership and can whatever steps are available to recover as much of your money as possible.