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Bankruptcy

When a company is going Chapter 11, it is usually a sad time for anyone who is expecting money from the company. Bankruptcy proceedings are beyond the scope of this book. Suffice it to say that when a company feels that it can no longer financially sustain itself, it files for Chapter 11 bankruptcy, which if approved puts the company under the legal protection of a court. Protection from whom? Anyone to whom the company is financially liable.

Bankruptcy, or the threat of bankruptcy, is the most damaging factor in a company’s stock. Nothing could possibly be worse. At the break of bankruptcy news (whether real or rumored), the stock price plummets. After all, who would want to own stock in a failed company? Unfortunately, the shareholders (i.e., owners) of the public company are the last in line to receive any proceeds.

Of course being in bankruptcy does not necessarily mean the end of the company. Many companies continue to operate under bankruptcy protection and some (after settling their accounts and re-organizing themselves to the court’s satisfaction) emerge from bankruptcy as a new company. In other cases, the company may have to be totally disbanded and its assets divided among the many creditors. Usually if a company is to be disbanded there is little left to pay off anyone.

Here is the usual order of asset distribution once the company has gone bankrupt or has been dissolved: