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If a company goes bankrupt, do I lose my stock?

On Behalf of | Mar 13, 2023 | BANKRUPTCY LAW - Business & Commercial Bankruptcy

In Idaho and other states, investing in the stock of public companies can provide wealth-building opportunities and financial goal achievement. However, buying stock comes with a degree of risk, including the chance that a company could go bankrupt. Bankruptcy can significantly impact the stock’s value and have negative financial repercussions for the shareholders. Understanding what happens to stocks because of bankruptcy is essential for anyone investing in the stock market.

Defining bankruptcy

A business & commercial bankruptcy is a legal process that enables a publicly held business to declare that it cannot pay its debts and seek protection from its creditors.

A bankruptcy court oversees the process, and the company follows a set of steps. A business typically files for bankruptcy protection after exhausted efforts to resolve financial difficulties through normal operations or negotiating with creditors.

The business may seek to reorganize by filing a Chapter 11 bankruptcy or liquidating its assets in a Chapter 7 bankruptcy.

How a Chapter 11 reorganization affects stock

A Chapter 11 bankruptcy filing allows a company to continue operating while it attempts to reorganize operations and restructure its debts.

The entity’s stock may still have some value, although news of the bankruptcy will likely cause the share price to fall significantly. The price may drop low enough that the stock becomes delisted from the exchange it trades on and must move to over-the-counter trading.

During a Chapter 11 reorganization, the company may choose to issue new shares of stock. The shares may dilute the existing shareholders’ stock value, although the company could cancel the existing shares and issue new ones instead. This action allows the firm to change its ownership structure and stock value. The existing shareholders would receive stock in the new, reorganized company, although the share value may be lower than the original shares.

Chapter 7 liquidation and stock

In a Chapter 7 bankruptcy, the business liquidates its assets to raise the money to pay off debts and distribute the proceeds to creditors.

The shareholders are last in line and will only receive something if the company has any remaining funds. When a company files for bankruptcy protection, the stock price has typically already dropped significantly. Its shareholders usually know the chance of recovering their investment is slim to nonexistent.

After the completed bankruptcy proceedings, the court may issue an order to cancel the company’s stock if the company has not voluntarily canceled the shares during the bankruptcy. The shares will cease trading on any exchange.

Understanding the risks of buying stocks can help investors better manage and diversify their portfolio risk.