A:

The fate of a liquidating company’s shares depends on the type of liquidation the company is undergoing. The most common type of liquidation is bankruptcy, of which there are two types. In a Chapter 11 bankruptcy proceeding, the shares of a company may continue trading during the reorganization process, although likely at a much lower value. In a Chapter 7 bankruptcy proceeding, the company stops all business and operations while a trustee is appointed to liquidate the company’s assets and payoff creditors and investors. In a Chapter 7 bankruptcy, there are usually very few assets left to pay shareholders, and the stock is generally worthless.

During a Chapter 11 bankruptcy, the company continues its daily operations, but all significant business decisions are made by the bankruptcy trustee. The stock continues to trade during that time. However, the stock is usually de-listed from the major exchanges since the company no longer meets the listing requirements. This usually has a significant impact on the stock’s price and liquidity. The stock may continue to trade over the counter or on the pink sheets as there is no federal law that prohibits trading. Still, no dividends are paid by the company while it is in the bankruptcy process. Studies show the shares of companies that undergo Chapter 11 reorganization have a track record of performing poorly subsequent to the reorganization.

In a Chapter 7 proceeding, the company is going out of business, and a trustee is appointed to wind down its affairs and sell off any assets. The assets are used to pay administrative expenses first, followed by the claims of secured creditors. The trustee then distributes any remaining assets according to a hierarchy of interest holders. Bond holders and preferred shareholders are paid first if there are any remaining assets. Common shareholders are last in line. As a practical matter, common shareholders do not receive anything.

RELATED FAQS
  1. How does chapter 11 bankruptcy affect a company's stocks and bonds?

    Learn more about what happens to companies that file for chapter 11 bankruptcy protection - and how it differs from other ... Read Answer >>
  2. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
Related Articles
  1. Personal Finance

    The Other Personal Bankruptcy Option: Chapter 13

    In a Chapter 13 bankruptcy, filers develop a plan to repay all or part of their "past due" debt. Any allowable debt left afterward is discharged.
  2. Taxes

    Bankruptcy Filing Changes That Could Affect You

    When the economy is down, more people file for bankruptcy. Make sure you know about the changes that have been made to this process.
  3. Small Business

    How Investors Can Profit From Bankrupt Companies

    Learn how a bankrupt company can provide great opportunities for savvy investors to find the best undervalued investment opportunities to profit from.
  4. Taxes

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  5. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  6. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  7. Investing

    Don't Go Broke Buying Bankrupt Stocks

    Don't be tricked by bankrupt companies' low stock prices; they're low for a reason.
  8. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  9. Personal Finance

    Should You File for Bankruptcy?

    Find out how to determine whether bankruptcy will help or hurt your financial situation.
  10. Personal Finance

    Worst Case Scenario For Credit Card Debt

    You may have heard of the dreaded Chapter 13 for personal bankruptcy, but there's something even worse - Chapter 7.
RELATED TERMS
  1. Chapter 10

    Chapter 10 was a type of corporate bankruptcy filing that was ...
  2. Wage Earner Plan (Chapter 13 Bankruptcy)

    A wage earner plan (Chapter 13 Bankruptcy) enables individuals ...
  3. Bankruptcy Trustee

    A person appointed by the United States Trustee, an officer of ...
  4. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  5. Chapter 15

    Chapter 15 is a section in the U.S. Bankruptcy Code added to ...
  6. Bankruptcy Abuse Prevention And Consumer Protection Act - BAPCPA

    Legislation enacted by President George W. Bush in 2005 that ...
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center