If I'm a stockholder, do I stand to gain anything during a business bankruptcy?

If you hold stock in a company that files business bankruptcy, there is a possibility that you will not be reimbursed for your stock. The stock may continue to trade if the bankruptcy is a Chapter 11 business bankruptcy, as opposed to a Chapter 7, but typically Chapter 11 business bankruptcy drives down the value of the business so the stock you own may be not eligible for the stock exchange process.

Can Stockholders Be Paid Back for Their Investments After a Business Bankruptcy?

The odds of a stock stockholder being paid back after a company's liquidation are very low. All creditors, both secured and unsecured, will need to be compensated before the stockholders after the liquidation of the business.

In cases where stockholders have received payback after a business bankruptcy, the amounts they’ve received have represented a very small percentage of the value of the shares.

What Happens During Business Bankruptcy?

There are two types of business bankruptcy, known as Chapter 11 and Chapter 7. 

• During a Chapter 11 business bankruptcy, the business owners will probably work with the court to restructure their finances if they plan to continue the business. During this type of restructuring, existing stock shares are often simply canceled, which is legal and within the rights of the bankruptcy court. At this point existing stocks are usually not worth very much. While shareholders may have the opportunity to vote on a Chapter 11 bankruptcy, the court can go ahead with the bankruptcy even if shareholders vote against it, so there is very little you can do to protect your investment in this situation.
• During the total shutdown of the business that occurs in the event of a Chapter 7, the assets of the company will be liquidated and used to pay back creditors. Unfortunately, there are often many creditors in line ahead of stockholders, so there will likely be nothing left by the time your claim comes up. 

Unfortunately, this usually means that any investment you had in the now-bankrupt company may be worth very little and may not even be tradable on the stock market. 

Getting Help

If you have shares in a business that is going bankrupt, you should consider speaking with an attorney. Your lawyer can help you try, whenever possible, to make a claim against the bankruptcy estate and, at a minimum, may be able to help you determine if you can obtain some tax benefits from your bankrupt shares.