A Bankruptcy Lawyer’s Blog

Bankruptcy and Stock

Chapter 11 is the chapter of the US Bankruptcy Code which deals with businesses seeking a reorganization bankruptcy. It is available to all businesses, regardless of whether they are small, sole-ownership ventures or the largest multi-national conglomerates. Businesses file for Chapter 11 bankruptcy when they are no longer able to pay their creditors. While a Chapter 7 liquidation bankruptcy causes the businesses to stop operation, a Chapter 11 allows companies to reorganize their debts and pay them back over time.

How Bankruptcy Affects Stock

Because so many larger companies are publicly traded corporations, many people are worried about how a bankruptcy will affect the value of the stock in that company. Generally speaking, when a publicly traded company files for Chapter 11 bankruptcy, it becomes delisted from its primary American stock exchange, whether it’s the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), or the NASDAQ. On the NASDAQ, a stock designated as bankrupt is designated with the letter Q following its stock symbol.

However, it is not uncommon for delisted stocks to become over-the-counter (OTC) stocks and continue listing. In most cases, once a company files for Chapter 11 bankruptcy, the shares of stock are terminated, making them worthless. While you as a stockholder will probably not receive any dividends on your investment while the company remains in Chapter 11 bankruptcy, once they are out of debt and have moved past the bankruptcy proceedings, your stock will increase in value again.

In Chapter 7 bankruptcy, the company ceases to exist as a business entity, which makes the stocks valueless on a permanent basis. When the company files for this liquidation bankruptcy, the company’s creditors have first right to money from the company, and you are less likely to receive any money for your stock.

Fortunately, losses you take on stock can be written off for tax purposes. When you sell off your stock for less than the purchase price, the resulting loss of funds is called a capital loss. Naturally, you have not incurred a capital loss until you sell your stock. That is, should the devalued stock continues to sit in your portfolio, its loss in value is not considered a capital loss until you sell it. Once you have sold the stock, though, you are able to claim this as a write-off when you file for taxes.

For more information about bankruptcy law, visit http://westpalmbeach-bankruptcyattorney.com

Joseph Devine