Corporations can file for bankruptcy, just like individuals. Bankruptcy is the legal declaration that you cannot pay your debts. However, the problem arises when the corporation is a large public company that has given out thousands of shares of stock to different stockholders. If you are one of these stockholders, you may be wondering how this company’s bankruptcy will affect you.
Don’t worry—when you are a stockholder, although you own a tiny piece of the company, you personally are not financially responsible for the company declaring bankruptcy. You may lose a lot of money because the value of the stock might drop to zero, but creditors won’t be banging you’re your door asking for millions, that’s for sure! However, as a stockholder, you are responsible to continue to understand how the company is operating throughout the bankruptcy. You do have a small say and how it operates.
Companies can choose to file either chapter 11 or chapter 7 bankruptcy. Most choose to file chapter 11. This means that, although the company cannot currently pay off its debts, it is hoping that with some help and with reorganization the company can be profitable again. The company’s stock can continue to trade while this is occurring. Sometimes a trustee and creditors will handle the reorganization, and sometime the new owners will handle it. It depends on the specific situation.
In this case, when the reorganization plan is complete, you as a stockholder will get a vote. You should read everything sent carefully, and if you agree vote in favor. If you do not agree, vote against. Your voice does make a difference, because if enough people vote against, the company cannot carry through with the plan.
However, in some cases, this is not how companies choose to proceed. If the company is deeply in debt and does not see any chance for coming back from this debt, even after a reorganization, the company will declare a chapter 7 bankruptcy and liquidate. When a company liquidates, the trustee sells all of the assets to pay off creditors. For, secured debts are repaid, and then unsecured debts are repaid. If there’s any money left, it is split amount he stockholders, but this is usually not the case.
The bottom line is that bankruptcy is bad for everyone. It is important to follow the things happening in your company so that you are aware of things like this that could be on the horizon. The stock market is a gamble, and sometimes it does not pay off.