Table Of Content
What Happens to Stock When a Company Goes Bankrupt?
When a public company files for bankruptcy, shareholders face serious consequences. Here’s what typically happens to the stock during and after the process:
Stock value often plummets immediately after the bankruptcy filing because confidence drops and the company’s ability to repay debts is questioned.
Shares may be delisted from major exchanges like NYSE or NASDAQ and moved to the OTC (over-the-counter) market, making them harder to trade.
Common shareholders are last in line during asset liquidation—after secured creditors and bondholders—so recovery is extremely rare.
A restructuring might wipe out existing shares entirely if new equity is issued to creditors under a Chapter 11 reorganization plan.
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How Does It Work: Example
For example, when Hertz filed for Chapter 11 in 2020, its stock dropped from over $20 to below $1. While speculative traders briefly revived it, original investors lost significant value.
Similarly, JC Penney’s bankruptcy left shareholders with worthless equity as new owners took over and restructured the company without them.
Bankruptcy signals a breakdown in a company's financial structure, and stocks rarely recover without dilution or complete elimination.
Do Investors Have Any Chance To See Their Money?
In most corporate bankruptcies, common shareholders have little to no chance of recovering their investment.
This is because bankruptcy law prioritizes debt repayment—creditors, bondholders, and preferred shareholders are all paid before common stockholders.
Unless the company reorganizes successfully under Chapter 11 and preserves some equity value (which is rare), common stock is usually wiped out.
For instance, Washington Mutual’s bankruptcy in 2008 led to a total loss for equity holders, while creditors received partial repayment over time.
Therefore, while not impossible, the odds of recovery for regular investors are extremely slim.
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Shareholder Repayment Priority in Bankruptcy
Stakeholder Type | Repayment Priority | Common Outcome in Bankruptcy | Example Case |
|---|---|---|---|
Secured Creditors | Highest | Typically repaid in full or partially | Lehman Brothers (2008) |
Unsecured Creditors | Medium | Often receive partial repayment | Enron (2001) |
Preferred Shareholders | Low | May recover some value in Chapter 11; usually nothing in Chapter 7 | Fannie Mae (2008) |
Common Shareholders | Lowest | Usually lose entire investment | Hertz (2020), Toys “R” Us (2018) |
Chapter 11 vs. Chapter 7 Bankruptcy: Impact on Stockholders
The type of bankruptcy filed has a significant influence on the outcome for stockholders. Here’s how Chapter 11 and Chapter 7 affect shareholders differently:
Chapter 11 allows the company to continue operating while reorganizing its debts, which can sometimes preserve shareholder value—but usually through dilution or stock replacement.
Chapter 7 involves full liquidation of assets, resulting in the company ceasing operations and stock becoming worthless almost immediately.
In Chapter 11, shareholders might receive new shares post-restructuring, especially if the reorganization plan includes equity swaps for debt.
Chapter 7 provides no such opportunity, as proceeds go directly to creditors, and shareholders typically receive nothing.
Factor | Chapter 11 (Reorganization) | Chapter 7 (Liquidation) |
|---|---|---|
Company Operations | Continues while restructuring | Ceases entirely |
Stock Trading | May continue OTC (with risk of dilution) | Typically ceases or becomes worthless |
Shareholder Recovery | Possible, but diluted or replaced | Almost always zero |
Management Control | Often replaced or overseen by creditors | Handled by a court-appointed trustee |
Example | General Motors (2009), Delta (2005) | Toys “R” Us (2018), Blockbuster (2010) |
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How Does It Work: Two Examples
Take GM’s bankruptcy in 2009: under Chapter 11, it emerged as a new entity (General Motors Company), but old shareholders lost their entire investment.
In contrast, Toys “R” Us filed for Chapter 7 in 2018, leading to liquidation—leaving equity holders with zero value and shuttering all operations.
While both types of bankruptcy are damaging to investors, Chapter 11 sometimes offers a sliver of hope through reorganization.
How Preferred Shareholders Are Affected by Bankruptcy
Preferred shareholders hold a senior position over common stockholders during bankruptcy, but they are still behind all debt holders.
- In a Chapter 11 filing, preferred shares may be converted into new equity or heavily diluted if creditors take over ownership.
- In Chapter 7 liquidation, they can receive partial repayment—but only if assets remain after debt obligations are satisfied.
For example, during Lehman Brothers’ bankruptcy, preferred shareholders were largely wiped out despite their higher ranking.
Therefore, while preferred stock offers some priority, it rarely protects investors fully in bankruptcy proceedings.
What Else Happens Next?
After a company files for bankruptcy, several developments unfold beyond just stock losses. These events can reshape the company or dissolve it entirely:
Creditors may gain control of the company by converting their debt into equity during Chapter 11 restructuring. This happened in Delta Airlines’ 2005 bankruptcy, where creditors became the new majority owners.
Employees often face layoffs or benefit cuts, as cost-saving becomes a priority. For instance, Sears reduced staff significantly during its bankruptcy to manage expenses.
Executives and board members may be replaced, especially if investors or courts see mismanagement as a cause of the bankruptcy.
Court-appointed trustees or committees step in to oversee operations, especially in Chapter 7 cases, ensuring fair asset distribution.
Each of these steps reflects the legal and operational reset a company undergoes, whether it's reorganizing or being dismantled.
FAQ
No, it’s legal. Even after filing for bankruptcy, shares may trade on OTC markets, though they carry extremely high risk.
Yes, you can usually sell them on OTC exchanges, but demand is low, and prices are often severely depressed.
Speculators may drive up prices temporarily, betting on a turnaround or for short-term gains. These spikes are highly volatile and risky.
Yes, company insiders are still subject to SEC rules. Trading on non-public information during bankruptcy proceedings is illegal.
They may temporarily, especially in index funds, but typically sell off positions once the company is delisted or valuation collapses.
No. Dividend payments are usually suspended immediately when a company files for bankruptcy due to lack of funds.
Sometimes, a reverse split happens before filing to maintain listing requirements. However, it doesn’t prevent bankruptcy or losses.
It’s possible if the company raises capital, restructures debt, or finds a buyer. However, those efforts often fail under heavy financial pressure.
The court oversees how assets are distributed. Shareholders typically have little influence, as creditors take priority.
Generally not. It’s a speculative bet with high risk and low chance of returns, especially for long-term investors.
