From the Enron scandal in the early 2000s to the recent folding of GT Advanced Technologies, when a business goes bankrupt, this can have an enormous ripple effect on those who purchased the business’s stock. Nothing can render a stock price more volatile than a hint of financial instability — and filing for Chapter 11 bankruptcy protection is a clear confirmation that the company’s finances are unstable. If you’re heavily invested in a company that files for bankruptcy, what should you expect? Does it make sense to immediately sell your investment, or hold on for hopes of recovery? If the company re-organizes, what happens to your shares? Read on to learn more about how bankruptcy can affect your investment, and what to do to preserve your funds.
What is a Chapter 11 bankruptcy?
A Chapter 11 bankruptcy is named for its placement in Chapter 11 of the Bankruptcy Code, and refers to the reorganization plans available to businesses. This type of bankruptcy is similar to the Chapter 13 bankruptcy available to individuals and sole proprietorships. Rather than merely wiping out outstanding debt, like a Chapter 7 bankruptcy, a Chapter 11 requires the trustee to help the company organize its debts, use existing and future revenue to pay down these debts in order of priority, and reorganize its finances so that it can avoid this type of instability in the future.
If the company is in such bad financial shape that a repayment plan isn’t feasible, a Chapter 11 can allow it to liquidate while still ensuring that priority creditors are paid.
What happens to shares of stock when a company files for Chapter 11?
Generally, a confirmed bankruptcy filing will cause the company’s stock to plummet, as worried investors quickly liquidate their investment. However, even if the shares fall to an incredibly low level, there still may be hope of recovery — depending upon whether the company is able to pay its investors and re-emerge as a solvent company, or instead plans to liquidate and sell off all assets.
If the company reorganizes, it may issue new shares of stock. This is for both practical purposes (distinguishing the “new” company from the “old” one) as well as to help free itself from the bad publicity of a bankruptcy. Usually when this happens, current investors are able to exchange shares of the old stock for shares of the new stock with no additional fees or penalties.
If the company recovers, and you’ve held on to your shares of stock in the interim, you may be able to recover your initial investment — or even some gains.
If the company liquidates, your stock will be sold at its closing price the day the liquidation is finalized and affairs wrapped up, and any proceeds are deposited into your investment account. Usually, there is some warning when a company plans to liquidate, so if you begin hearing these types of rumors, you may want to sell as soon as you can. For more advice, contact a professional such as Thrush Douglas L Attorney at Law.