Your Stock after Corporate Bankruptcy

Corporate bankruptcy is an event that can drastically affect the portfolios of many investors. Many people are unsure what exactly would happen if a company that they hold stock in filed for bankruptcy. Here are a few things to consider about what happens to your stock after corporate bankruptcy.

Type of Stock

First of all, you need to determine what type of stock you have. Companies regularly issue different classes of stock, and each class of stock is going to have different rights during bankruptcy. You could potentially have preferred stock or common stock. Preferred stock is going to be ahead of common stock when it comes to getting any of the assets that are left over after a bankruptcy. When a company files for bankruptcy, the stockholders are going to collect any liquid assets that are left over after the creditors are done taking what they are owed. Therefore, when it comes to bankruptcy, you are going to have a better chance of getting something from the company if you are a preferred shareholder. Common stockholders rarely get anything during a traditional corporate bankruptcy.

Type of Bankruptcy

When you are trying to figure out what is going to happen with your stock, you also need to understand what type of bankruptcy the company is filing. The company could potentially file chapter 7 or Chapter 11 bankruptcy. Chapter 7 is known as a liquidation bankruptcy. Chapter 11 is known as a reorganization bankruptcy. If the company files for chapter 7, they will be going out of business. In that case, you are not going to be able to sell shares of your stock. When this happens, if your stock is preferred, you might be able to collect some type of payment from the remaining liquid assets.

If you are a shareholder in a company that is filing for Chapter 11, you will still have some value in your stock. If you wanted to, you could most likely sell your shares on the open market. Keep in mind that if you do this, the value of your shares is going to be very low. 

During a Chapter 11 bankruptcy, the company is still going to be in business. They are simply reorganizing their debt, and there is a chance that they will be able to emerge from this process successfully. In that case, the value of your shares could increase substantially over the next several months or years.

Liability

Many people wonder whether they are going to be responsible for the debts that are incurred by a company during bankruptcy. If you are a shareholder, you are not going to have to come up with any money to pay for the company's debts. As a shareholder, your initial investment in the stock is the most that you can be out. You can lose the amount of money that you have in the company, but they cannot ask for more. 

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