Advice About Companies Going Bankrupt

Feb 13th, 2014 | By | Category: Info

In this article today I’m going to discuss what you should do, and everything you should not do, if a business you have invested in suddenly goes bankrupt.

I’m not going to lie to you… I have owned shares of stock in a society that has gone bankrupt in the past. If you want to be aware of the name of the company I’ll even tell you; it was WorldCom and I owned 1, 000 shares. I was just convinced that the company wouldn’t declare bankruptcy and so I held on till the very end. But the company did go bankrupt.

But What About This??

For the most part you’ll normally have two choices when a firm goes into bankruptcy. You can either hold on to the stock and hope against hope that the business will somehow recover, or you can sell the stock and take the loss immediately.

Most of the time a bankrupt company will do either one of two things. First, it may reorganize itself under what is known as a Chapter 11 bankruptcy during which time it continues as a viable entity and has the opportunity to pay back its creditors and reverse most of its losses.

Intensifying competition and limited access to capital left the chain, founded in Brooklyn by Frieda Loehmann, with no choice, said its chairman, Michael Appel. Liquidators have offered to buy Loehmann’s assets, and if a better offer doesn’t surface, the retailer’s next sale will be its last. Filing for Chapter 11 protection from creditors no longer provides retailers with the fresh start it once gave stores like Macy’s. These days, it often means the end of the line, according to a study …

On the other hand a business may be completely dissolved in what we call Chapter 7 or Chapter 13 bankruptcy. When this happens the property of the company are usually completely liquidated and used to pay off its creditors. It’s good to see that a shareholder isn’t a creditor which means you’ll not see a penny of that money yourself. Chapter 7 or 13 bankruptcies are commonly decided by a court, called a bankruptcy court.

You may be in a position to get your money back as a shareholder under Chapter 7 or 13 but only if absolutely everybody else gets paid back first, including any creditor the company may have, any taxes the company may owe, and any bondholders the company may have. That’s right bonds get paid back before shares in a bankruptcy. It is highly highly unlikely that there’ll be any money left after all of these individuals get paid off, but though there is it will go to the shareholders… but I’m not aware of a single instance when that has actually happened in the real world.

If a company is liable to be reorganize under Chapter 11 bankruptcy then it is possible, several years down the line, the shares of the stock in the business will rebound. But realize even in the best case scenario it’s going to take years for this to happen, if it comes in at all. So you have to ask yourself whether or not you can afford to wait and whether or not you can afford to run the risk that the company will not ever actually turn itself around.

How old is the company which you want to join? If the business is new, be careful. If the company has been in existence for at least five years, then it could come under consideration.

Most of the time the right thing to do is simply sell your stock and take a loss. After all, in certain circumstances you can even use the loss as a tax write off. Consult your accountant or tax attorney to be sure before hand.


Comments are closed.