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What happens to stocks after Chapter 11?

When a Texas company files for protection under Chapter 11 of the Bankruptcy Code, it must submit a plan to reorganize its debts. Unlike Chapter 7, Chapter 11 bankruptcy cases do not involve the liquidation of the company’s assets. Instead, its debts will be reorganized to make them more manageable, and the business will be allowed to continue its operations. Shareholders of a company that has filed for Chapter 11 bankruptcy will likely wonder what will happen to their stocks. Here’s what will happen to stocks held in a company that has filed for Chapter 11 bankruptcy.

Effect on stocks held by shareholders pre-bankruptcy

Following the filing of a company’s Chapter 11 petition, the stocks held by its shareholders will lose most of their value. When the company was in relatively good financial health prior to the bankruptcy and chose to pursue a Chapter 11 case for strategic purposes, the investors might receive significant compensation, including the option to exchange their old shares for new shares in the company. However, if a company doesn’t offer the option to exchange shares, the stocks will be essentially valueless. If the company subsequently offers new stocks but doesn’t allow the shareholders to exchange them, the investors will lose their investments.

When a reorganization plan is denied

If the company fails with its reorganization plan, the court can convert it to a Chapter 7 bankruptcy. In that case, the business’s assets will be liquidated. The proceeds will be divided among the creditors. However, the shareholders will not be considered to hold priority debts, so they will not likely receive much of anything.

Understanding how stocks are impacted by corporate bankruptcy is important. When investors are considering investing in companies, it is important the carefully evaluate the business’s financial strengths and liabilities. Conducting due diligence before purchasing shares might help shareholders protect their investments and grow their wealth.