It’s not just individuals who are struggling today in America’s tepid economy. Businesses such as Sbarros, Blockbuster and Borders have had to file a company bankruptcy over the last several years, leaving many stockholders to wonder what will happen to their stock shares when these companies go bankrupt.
Recently on our bankruptcy forum a user asked, “I have shares in a company who recently announced they are going to file for a company bankruptcy. Will I get paid or do I simply lose my entire investment?”
Company bankruptcy who gets paid?
If you are a common stockholder in a company and the company is filing for bankruptcy protection, unfortunately, you will probably lose your investment. Let’s take a closer look at who is first in line to recoup their investment.
The first in line to recover payment if a business declares a company bankruptcy are the employees. The company is also responsible for paying required payroll taxes.
Next, secured creditors may be paid. This can include any lenders, such as banks, who loaned the company money to purchase real estate or assets with a tangible value. Secured creditors may simply repossess property or they may be paid with monies which are generated from the sale of assets.
The next creditors in line to receive payments after a company bankruptcy filing are general creditors, including supplies of goods and services, other lenders, and potentially bondholders, who include anyone who owned bonds and who was expecting to receive payment for their bond investment.
Finally, and this is where you come in, the stockholders are paid. Unfortunately, as you can see, you are the last in line when a business files a company bankruptcy. Stockholders purchase stock with the understanding that they are taking the greatest risk if the company does not succeed. While this risk can have a big payoff if the company does well, stockholders can also lose big if the company fails.
(More information about general guidelines for payment during bankruptcy can be found in Section 507 of the Bankruptcy Code)
What if the company restructures under Chapter 11 bankruptcy?
If a company announces they are going to file Chapter 11 bankruptcy their stock value is likely to plummet, and shares that were trading at $60 may drop to $2 per share.
As time passes and stockholders become even more skittish that the company may not pull through, the share price of the stock is likely to fall even lower, leaving the shareholders with worthless shares.
In some cases, the company may be able to successfully restructure under a Chapter 11 bankruptcy plan, and the share price of the once bankrupt company could rise to higher levels than previously experienced. Unfortunately, this scenario is the exception rather than the rule.
Bottom Line for a company bankruptcy
If you own stock in a company who has filed for bankruptcy protection it is likely you will lose whatever investment you had made in their stock. In some cases, however, companies are able to restructure their organization through Chapter 11 and emerge from bankruptcy operating stronger than ever.