Standing Tall When It Matters Most

How shareholders are treated during a bankruptcy

If a company goes bankrupt, shareholders in Texas and elsewhere may lose a significant amount of money. However, the extent of their losses typically depends on what type of protection they seek from creditors. Companies that seek Chapter 7 protection typically cease to exist while those that file for Chapter 11 protection may continue to operate.

What to know about Chapter 7 cases

In a Chapter 7 proceeding, a company’s assets are liquidated with any funds raised going to its creditors. Generally speaking, shareholders are near the bottom of the repayment hierarchy. This means that you will be paid after secured bondholders, unsecured bondholders and holders of subordinated debts are paid off. If there is no money left after those parties have been paid, you will likely get nothing from the company in which you invested.

What to know about Chapter 11 cases

One of the key differences between Chapter 7 and Chapter 11 cases is that Chapter 11 allows a firm to reorganize. The company will reorganize its debts and make other moves as part of a plan that must be approved by a bankruptcy judge. However, it is worth noting that shares of a bankrupt company may be eliminated and replaced by new shares. Therefore, it’s possible that the value of your current holdings may be reduced significantly even if the organization continues to operate.

While investing in a business may be an effective way to grow your wealth, being an investor also comes with a significant amount of risk. Therefore, it may be a good idea to consult with an adviser before buying shares of any company regardless of how strong you perceive it to be. This may be especially important if the company is not listed on a stock exchange.