What Happens to Your Stock When a Company Goes Bankrupt?
It’s no secret that the COVID-19 pandemic wreaked havoc on the American economy last year, putting millions out of work and forcing businesses both large and small to close their doors. Among the publicly traded companies that sought bankruptcy protection in 2020 were rental car company Hertz Global Holdings and oil and gas producer Chesapeake Energy.
The good news is, just because a company goes bankrupt doesn’t necessarily mean it’s been given the kiss of death. Depending on the type of bankruptcy and the company involved, it can still operate and even rebound financially. In rare cases, it can even keep its stock alive so shareholders aren’t left empty-handed.
That’s been the case with Hertz. It filed for bankruptcy protection in May 2020 amid a steep drop in travel during the pandemic, but its shares continue to trade over-the-counter, albeit at a massive discount from a few years ago.
The stock even got a boost in recent months after Hertz announced a plan to exit bankruptcy that would benefit shareholders.
About Chesapeake Energy
Chesapeake Energy filed for bankruptcy protection last June after it piled up more than $9 billion debt amid a rapid decline in oil prices. Its stock was delisted from the New York Stock Exchange that same month. However, the company continued operating. In May 2021 it reported a first-quarter profit of $295 million in its first earnings call after emerging from bankruptcy three months earlier. Chesapeake’s stock resumed trading on Feb. 10 at $43 a share, and had risen above $55 by early June.
Keep reading to learn more about what happens to stocks when a company goes bankrupt.
The first thing you need to know is that there are two main types of bankruptcy in the United States. As an investor, it’s important to understand the differences. Here’s a quick primer:
Types of Bankruptcy
- Chapter 11: In this type of bankruptcy, the company seeks court protection from creditors until it files a financial recovery plan. If the plan is accepted, the company can renegotiate debts, cut costs and keep doing business. It can also eventually emerge from bankruptcy and even recover financially.
- Chapter 7: This type of bankruptcy means the company has closed for good and intends to sell all of its assets and use the proceeds to pay back creditors.
Bankruptcy Isn’t Always the End of the Company…
One common misconception is that filing for bankruptcy is the same as going out of business. In truth, bankruptcy is often a way to stay open.
Chapter 11 bankruptcy usually occurs when a company is shouldering more debt than it can pay off in the course of normal business operations. In many cases, that same company believes it can operate profitably again once it gets its debt load under control. This is in stark contrast to a Chapter 7 bankruptcy filing, when the company simply opts to close its doors and sell off all of its remaining assets.
…But It’s Usually the End for Your Shares
Unfortunately, bankruptcy usually comes at the cost of your investment. As a shareholder, you’re essentially a part owner of the company, meaning you’re also on the hook for the company’s debt.
If a company you invest in files for bankruptcy, it hands over all decision-making to the bankruptcy court until the company and its creditors can arrive at an acceptable settlement. The court, in turn, prioritizes the debts to determine who gets paid in what order. Secured creditors come first, followed by unsecured creditors. Existing shareholders bring up the rear.
As a shareholder, there could still be some actual value left over for you when the process is completed. Just don’t expect the same value you had when you bought the stock. If a company could pay off all of its debts and still have something substantial left for shareholders, why would it be going into bankruptcy in the first place? Even if you do get something for your shares in the end, it’s not likely to be much.
Trading a Bankrupt Company’s Stock
Although your shares might prove worthless following a bankruptcy, that’s not always the case. A bankrupt company will almost certainly have its shares delisted by the Nasdaq or the NYSE, but the shares might still trade on over-the-counter markets. In this case, shares of a company that has entered bankruptcy will have a “Q” as the final letter in its ticker.
An example is Hertz, which now trades under the ticker HTZGQ at about $6 a share, which is actually up from its price when it filed for bankruptcy in May 2020.
New shares of the stock might also be issued without being authorized by the company. These are usually used to compensate creditors who loaned the company money but won’t be getting it back. Those shares will have a ticker symbol that ends with a “V” to indicate that they are shares involved in bankruptcy and exist “as issued.”
Good To Know
Why would anyone buy stock in a company that’s bankrupt? Turns out, there is a small cadre of speculators who specialize in buying and selling shares of companies in bankruptcy — a risky but potentially lucrative practice.
If a company you invested in files for bankruptcy, here are some important points to keep in mind:
- With Chapter 11 bankruptcy, the company is asking for a chance to reorganize and recover. If it survives, your shares might remain active if the company decides to let them continue trading. But if it cancels existing shares, yours will be worthless.
- With Chapter 7 bankruptcy, the company is closing its doors and your stock will have no value.
- Owners of common stock often get nothing when a company enters liquidation because they are the last in line for payment. If a common shareholder is paid, the payment will be based on the proportion of ownership they have in the bankrupt company.
Vance Cariaga contributed to the reporting for this article.
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- Yahoo Finance. 2021. "These Are the 10 Big Companies That Went Bankrupt Due to COVID."
- MarketWatch. 2021. "'Bankrupt Hertz' Stock Soars 62% On News of Deal to Exit Chapter 11."
- Reuters. 2021. "Chesapeake Energy Posts Profit After Bankruptcy Exit."
- PR Newswire. 2020. "Chesapeake Energy Corporation Receives Notice From NYSE."
- Yahoo Finance. "Chesapeake Energy Corporation (CHK) Stock."
- Yahoo Finance. "Hertz Global Holdings INC (HTZGQ) Stock."