What Happens to Bankrupt Stocks?

by Vicki A. Benge

The majority of stock companies that file bankruptcy use Chapter 11 procedures, according to the U.S. Securities and Exchange Commission. This reorganization method of filing bankruptcy allows a company to remain in business and management to be involved in the reorganization. Even if a company stays in business during and after bankruptcy, its stock may go away. A May 2011 Bloomberg Businessweek article reported that according to a new study, bankrupt companies are less likely than ever to have assets remaining for existing stockholders.

Chapter 11

Stocks of bankrupt companies undergoing reorganization, such as in Chapter 11 proceedings, may continue to trade. However, as the SEC also points out, the majority of public companies going through Chapter 11 reorganization are not qualified to trade on the major exchanges, such as the New York Stock Exchange or Nasdaq. These exchanges have strict rules governing the financial strength of listed companies and thus bankrupt stocks are usually removed. The stock may continue to trade over-the-counter, but the price will have plummeted by this time.

Trading During Bankruptcy

Although stocks of companies undergoing Chapter 11 bankruptcy reorganization may continue to be available for trading, the SEC warns that investors buying stock in a company during Chapter 11 bankruptcy should expect financial loss. In addition, as part of the reorganization process, creditors may become the new stockholders in the company. The SEC also states that in most Chapter 11 cases bankrupt stocks are simply canceled, which means the value drops to zero.

Two Stocks

Investors often continue to trade bankrupt stocks in hopes of finding that one gem that will recover with surging stock prices. However, the company may for a time seem to have two stocks on the market. The Financial Industry Regulatory Authority reminds investors that authorities issue a new ticker symbol to the old stock of bankrupt companies, adding a "Q" to the symbol to warn investors that the stock is bankrupt. When and if the company emerges from bankruptcy, the old stock is generally canceled.

Chapter 7

Public companies undergoing Chapter 7 bankruptcy proceedings liquidate, meaning they pay liabilities with any available capital and sell assets as needed. Ultimately, any assets remaining to be divided during a bankruptcy proceeding first go to all other claimants besides stockholders. Secured creditors, such as a financial institution with a property lien, get first dibs on assets. Then unsecured creditors, such as vendors and bondholders are next. Stockholders, the legal owners of the company, claim anything remaining. However, companies that undergo Chapter 7 bankruptcy generally have nothing left for stockholders. In other words, shares of the company’s stock have no value.

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