Bankruptcy: What Happens to Stock Holdings
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Filed under Bankruptcy
One major concern that all investors have is whether the stock they buy is of a company that might go bankrupt. This is because most large companies are publicly traded corporations. The name of a publicly traded company does not appear on primary stock exchanges when it files for Chapter 11 bankruptcy. For instance, after a company goes bankrupt, it gets delisted from the American Stock Exchange (AMEX) and the New York Stock Exchange (NYSE). NASDAQ designates the letter Q to a bankruptcy stock.[br]
Bankruptcy Stock: Chapter 11
According to the US Bankruptcy Code, companies seeking reorganization bankruptcy are required to file for Chapter 11 bankruptcy. Whether it is a multinational corporation, sole-ownership venture or a small business organization, Chapter 11 is available to all. A company has to file for Chapter 11 bankruptcy if its liabilities are more than its assets and it is not in a position to repay its creditors. Following the filing, the debts are reorganized and the company is allowed to pay them off over time. The shares of the company are terminated and are rendered worthless. In some instances, delisted bankruptcy stocks continue being listed since they become over-the-counter (OTC) stocks. During the bankruptcy phase and until a company recovers from it the stockholder do not receive dividends in any form. However, the value of the stock increases once again when the company passes that phase.[br]
In most cases, when things are settled, bondholders may be entitled to new stock, new bonds or both, in exchange for their bonds. The trustee may ask stockholders to swap their bankruptcy stock with shares in the reorganized company. Investors may receive very few shares that could even be worthless. The reorganization plan is a breather for investors because it allows them to understand what they should expect and what their rights are. The good news is that the losses borne by investors (in the form of capital loss incurred by selling devalued bankruptcy stock) are written off for tax purposes.
Bankruptcy Stock: Chapter 7
When a business files for Chapter 7 bankruptcy, its stocks become worthless forever. The assets of such a business are liquefied and the money is distributed among creditors by a court-appointed trustee. Investors are the biggest losers in this case as they do not get any money for their investment in bankruptcy stocks.