Interested in what happens when a publicly traded company declares bankruptcy? Investor.gov has a breakdown of the process.
A publicly traded company may declare bankruptcy when it is hit with a dangerous amount of debt. These companies have the option of filing Chapter 7 or Chapter 11 bankruptcy.
Chapter 7 is for companies that are going out of business due to their debt. This requires them to have a trustee appointed that will handle the liquidation of its assets.
Chapter 11 is for companies that are looking to restructure their debt and reorganize their business. The company will still be run by its management team, but will have to approve its reorganization via a bankruptcy court. The final goal is to come out of bankruptcy with a more manageable debt.
Here’s what happens to common stock in a bankruptcy.
“Regardless of the type of bankruptcy a company files under, any common stock in a bankrupt company is likely to be worthless. That is because the common stock (that is, “equity”) is the last in line to receive what’s available to be distributed in a bankruptcy proceeding. Creditors, including bondholders, suppliers and employees, all come before holders of the company’s common stock. And, even if a company successfully reorganizes, its plan of reorganization often cancels the existing shares of common stock.”