What will happen to my stocks or bonds in a business bankruptcy?

When a business goes bankrupt, there will be winners and losers amongst its creditors and stockholders. Those who hold debt, like bondholders, will stop receiving interest and principal payments while the company goes through bankruptcy. However, bondholders may ultimately receive payment or new notes. Once the bankruptcy proceeding is concluded, if you are a bondholder, you may receive new stock in exchange for your bonds, new bonds, or a combination of stocks and bonds.

Risks for Stockholders

The bankrupt company’s owners or stockholders are the last to be paid after bankruptcy. During proceedings, stockholders will stop receiving dividends. The trustee appointed during the bankruptcy may ask you to return your stock in exchange for shares in the reorganized company. The new shares may be fewer in number and be worth less.

The reorganization plan will spell out your rights as an investor and what you can expect to receive. Another possible outcome is the bankruptcy court may determine that stockholders don't get anything because the debtor is insolvent. If the company's liabilities are greater than its assets, your stock may be worthless.

Buying Stock from Chapter 11 Companies

While you may not hold stock in a Chapter 11 company, you might decide that it’s a good idea to take advantage of depressed prices. Others may want to increase their “ownership” in the company during this time. These purchases are possible, but come with a great deal of risk. A company's securities may continue to trade even after the company has filed for bankruptcy under Chapter 11; there is no law prohibiting this. Oftentimes, companies in bankruptcy cannot meet the listing requirements to be traded on a major exchange like the NASDAQ, but can be bought elsewhere.

Investors should be cautious when buying common stock of companies in Chapter 11 bankruptcy. It is extremely risky and is likely to lead to financial loss. Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders take priority in becoming the owners of the shares in the new company. As mentioned before, shares available to stockholders may be worth less or completely devalued. Sometimes, the company's plan of reorganization will cancel the existing equity shares.