A:

In declaring bankruptcy, a company is basically telling the market that it owes more money than it is worth. If the company undergoes an approved reorganization, previous shareholders are likely to be wiped out, because new shares are often issued once the company emerges. If it's an out and out bankruptcy, the company's existing assets are then sold off and the money is given to creditors before shareholders. In the vast majority of cases, there is little or nothing to pass on to shareholders.

Now, if another company wants to buy up a company after it has filed for bankruptcy, it could swap stock, giving shareholders in the bankrupt company a chance to make back their losses. Unfortunately, it makes far more sense for the acquiring company to simply bid on the specific assets that interest it, rather than acquiring a defunct company and its debts. This way, the acquiring company pays less for what it wants and the money paid will most likely go towards trying to satisfy creditors.

In the unlikely case of this happening, it is possible (but far from probable) that shareholders in a bankrupt company could end up with shares of the acquiring company. If it were a cash transaction for the whole or any part of the company, most (likely all) of the money would still go to creditors and senior lenders. In nearly all bankruptcy proceedings involving liquidation rather than a reorganization, existing shareholders see no return. (Learn more more about bankruptcy from a shareholders perspective in our article An Overview Of Corporate Bankruptcy.)

This question was answered by Andrew Beattie

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