What to do when a company you invested in goes
bankrupt
Investing in the stock market is not the easiest thing in the world to
do... far from it! Make a few wrong moves and you can lose your shirt
before you know what's happened. Hopefully that will never happen to
you, but what happens if it does?
In this article today I'm going to discuss what you should do, and what
you shouldn't do, if a company you have invested in suddenly goes
bankrupt.
I'm not going to lie to you... I have owned shares of stock in a
company that has gone bankrupt in the past. If you want to know the
name of the company I'll even tell you; it was WorldCom and I owned
1,000 shares. I was just sure that the company would not declare
bankruptcy and so I held on till the very end. But the company did go
bankrupt.
For the most part you will usually have two choices when a company goes
into bankruptcy. You can either hold on to the stock and hope against
hope that the company will somehow recover, or you can sell the stock
and take the loss immediately.
Most of the time a bankrupt company will do either one of two things.
First, it may reorganize itself under what is called a Chapter 11
bankruptcy during which time it continues as a viable entity and has
the chance to pay back its creditors and reverse most of its losses.
On the other hand a company can be completely dissolved in what we call
Chapter 7 or Chapter 13 bankruptcy. When this happens the assets of the
company are usually completely liquidated and used to pay back its
creditors. It's good to note that a shareholder is not a creditor which
means you will not see a penny of that money yourself. Chapter 7 or 13
bankruptcies are usually decided by a court, called a bankruptcy court.
You may be able to get your money back as a shareholder under Chapter 7
or 13 but only if absolutely everybody else gets paid back first,
including any creditor the company may have, any taxes the company may
owe, and any bondholders the company may have. That's right bonds get
paid back before shares in a bankruptcy. It is highly highly unlikely
that there will be any money left after all of these people get paid
off, but if there is it will go to the shareholders... but I'm not
aware of a single instance when that has actually happened in the real
world.
If a company is likely to be reorganize under Chapter 11 bankruptcy
then it is possible, several years down the line, the shares of the
stock in the company will rebound. But realize even under the best case
scenario it's going to take years for this to happen, if it happens at
all. So you have to ask yourself whether or not you can afford to wait
and whether or not you can afford to take the risk that the company
won't ever actually turn itself around.
Most of the time the best thing to do is simply sell your stock and
take a loss. After all, in certain circumstances you can even use the
loss as a tax write off. Consult your accountant or tax attorney to be
sure before hand.
Article Source:
http://www.articlesbase.com/investing-articles/what-to-do-when-a-
company-you-invested-in-goes-bankrupt-1850236.html About the Author
Jason Markum has been writing articles online for
almost 14 whole years. When not writing about investing, he enjoys
running a lighted cosmetic mirror web site
where he reviews a good lighted magnifying mirror for your
beauty needs. |
