When a company files for Affiliate 11 bankruptcy protection, it doesn't hateful that it is going out of business (that's Chapter vii). Rather, Chapter eleven is used by companies that experience their operations can continue profitably just after a restructuring to get its debts under command.

In general, when a company files for Chapter 11 protection, its stock price plummets and a "Q" is added to its stock symbol to clearly signal that the company is in bankruptcy proceedings. So, what happens to the company's stock when it exits bankruptcy protection?

Last in line
Unfortunately, in the effect of a defalcation restructuring, common shareholders are terminal in line when information technology comes to claiming a company's assets.

One of the main objectives of a Chapter eleven reorganization is to take care of the company'southward creditors and restructure the debts in a mode that the company can continue to operate. And these creditors get paid back in the order of the priority of their claims.

Secured creditors (usually banks) get paid dorsum get-go, followed past unsecured creditors such as bondholders. If a company has preferred stockholders, they are side by side in the priority line after bondholders. Stockholders are the concluding in line, and mostly only get annihilation if the remainder of the creditors are repaid in full. And since the reason well-nigh companies use Affiliate xi protection in the first identify is an disability to pay their debts, you tin can probably imagine that this doesn't happen likewise frequently.

What happens to the stock?
The brusk answer is that most of the time, the stock of a company in Chapter 11 becomes worthless and shareholders get completely wiped out. Purchasing stock of a broke company for pennies per share and hoping to brand a quick cadet when the company restructures virtually e'er turns out to be a bad idea.

The company may issue new shares upon emerging from defalcation, at which point the old shares are cancelled and get worthless. The new shares are often issued to its creditors in exchange for a reduction or forgiveness of the outstanding debt.

Now, the story doesn't e'er have a completely distressing ending. In that location have been cases where existing shareholders receive something after the company emerges from bankruptcy -- normally a small portion of the newly created stock or a relatively pocket-sized greenbacks payment. However, it's not a skilful idea to count on it. It'south rare and unremarkably isn't much even when it happens. A study found that of the 41 publicly traded companies that went bankrupt in 2009 and 2010, shareholders of merely four of them got any kind of return at all. The residual got wiped out completely.

In a nutshell, while defalcation doesn't take to be a consummate capital punishment for the investments of the company'southward common shareholders, that'southward unremarkably the example. Visit our broker center to start investing today -- and avert the backlash of bankruptcy by choosing solid, healthy businesses.

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