InvestorsHub Logo
Followers 4
Posts 31
Boards Moderated 0
Alias Born 05/08/2017

Re: Amber786 post# 1739

Thursday, 12/14/2017 10:36:05 PM

Thursday, December 14, 2017 10:36:05 PM

Post# of 1811


Does a shareholder lose all of their equity once a Chapter 11 bankruptcy is filed by the company?
By Chizoba Morah
SHARE




A:
When a company files for Chapter 11 bankruptcy, the management of the company is still in charge of the daily operations. That said, significant business decisions, especially those pertaining to debt or debt securities, are sent to the bankruptcy court for approval. While the firm is in Chapter 11, its stock will still have value, but there is a temporary trading freeze. Although the stock will be delisted, over the counter (OTC) trading may still occur. In other words, the equity a broker has invested in the firm is not valued at zero, but their true value cannot be easily determined since the shares are no longer publicly traded.

If the company proceeds to file for Chapter 7 bankruptcy, the company's creditors are paid in a specific order. Generally, investors or creditors are paid in the following order:


1) Secured creditors
2) Unsecured creditors
3) Shareholders


Usually, little to nothing is leftover for shareholders after the more senior creditors are paid. However, if the company restructures and emerges from Chapter 11 as an improved organization, its share price may rise to higher levels than previously witnessed.

When a corporation is on the verge of bankruptcy, its stock value will reflect the risk that a Chapter 11 may become a Chapter 7. For example, a company traded at $50 may trade at $2 per share due to bankruptcy speculation. If Chapter 11 is actually filed, the stock price may fall to 10 cents. This value is composed of the potential income that shareholders may receive after liquidation and a premium based on the possibility that the firm may restructure and begin to operate successfully in the future. Private investors can buy and sell these 10-cent shares in the OTC market. The actual value does not reach zero unless the probability of restructuring is so low that a Chapter 7 filing is sure to follow.

For more, check out What are the differences between Chapter 7 and Chapter 11 bankruptcy?


This question was answered by Chizoba Morah.



RELATED FAQS
What are the differences between Chapter 11 and Chapter 13 bankruptcy?
Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
What happens when a corporation declares bankruptcy?
Understand what options are available to corporations under bankruptcy protection, and learn what takes place after bankruptcy ... Read Answer >>
What happens to a company's stocks and bonds when it declares chapter 11 bankruptcy ...
Filing for chapter 11 bankruptcy protection simply means that a company is on the verge of bankruptcy, but believes that ... Read Answer >>
What happens to the shares of a company that has been liquidated?
Learn what happens to a company's shares during Chapter 11 and Chapter 7 bankruptcy proceedings, and understand how much ... Read Answer >>
RELATED ARTICLES
Bankruptcy Filing Changes That Could Affect You
SPONSORED CONTENT
Back-Tested Strategies: Real or Random?
BY VANGUARD
File Chapter 7 Bankruptcy
Your Guide To Chapter 7 Bankruptcy
When To Declare Bankruptcy
How To Survive A Bankruptcy Filing
Changing The Face Of Bankruptcy
How to Hire a Bankruptcy Lawyer
Worst Case Scenario For Credit Card Debt
Don't Go Broke Buying Bankrupt Stocks
RELATED TERMS
Chapter 10
Chapter 7
Bankruptcy Abuse Prevention And Consumer Protection Act - BAPCPA
Chapter 15
IRS Publication 908
Chapter 13
WORK WITH INVESTOPEDIA
About Us Advertise With Us Contact Us Careers
© 2017, Investopedia, LLC.
Feedback All Rights Reserved Terms Of Use Privacy Policy



Read more: Does a shareholder lose all of their equity once a Chapter 11 bankruptcy is filed by the company? https://www.investopedia.com/ask/answers/10/stock-holder-lose-equity-chapter-11.asp#ixzz51IU3ku7g
Follow us: Investopedia on Facebook

Join the InvestorsHub Community

Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.