Not every investment is going to be a success. Some companies may end up falling in value after you invest in them. In a worst-case scenario, it's also possible that a company you've invested in goes bankrupt. Bed Bath & Beyond is one of the most recent examples, but there have been plenty of companies throughout the years that went from being successful to shutting down.
If you own shares in a business that filed bankruptcy, you're probably wondering what happens next. Although this is never good news, the potential outcomes will depend on the type of bankruptcy filed. Businesses normally declare either:
- Chapter 11 bankruptcy
- Chapter 7 bankruptcy
Your stock broker will forward information to you from the company about what's going on. Here's what you can expect to happen and how you can protect yourself from these kinds of situations.
Read more: unlock best-in-class perks with one of these brokerage accounts
A Chapter 11 bankruptcy allows for reorganization and potentially rehabilitation of the business. Most publicly held companies file this type of bankruptcy because they can continue operating their businesses and control the bankruptcy process, according to the SEC. The company will need to file a plan with the bankruptcy court about how it plans to recover.
When a company files Chapter 11 bankruptcy, its shares may continue to trade. They will likely lose a large portion of their value, and they could be delisted from the major stock exchanges.
There are a few potential outcomes if a company you've invested in files Chapter 11 bankruptcy:
- The company cancels its old shares and issues new ones. Your old shares would then become worthless.
- The company continues using its old shares. They may increase in value if it's able to recover.
- The company isn't able to recover. Common stock shareholders will be the last in line to get their money back.
The bottom line is that there's a slim chance the company recovers and continues using its old shares. But it's far more likely that it doesn't recover, or if it does, it issues new shares. Here's what the SEC says on its website about this: "In most instances, the company's plan of reorganization will cancel the existing equity shares."
Chapter 7 is a liquidation bankruptcy. The business ceases operations, and a trustee is appointed to liquidate its assets and pay off as much of its debt as possible. The payment order is based on bankruptcy laws, with secured creditors taking priority over everyone else.
Unfortunately for shareholders, they're last on the list of who gets paid. It makes sense, because when you invest in a company, you effectively own a share of it. As such, you benefit much more than its creditors if the company is successful. This also means you take on more risk.
While it's theoretically possible that you get some money back, it's highly unlikely. The SEC says that "Stockholders do not have to be notified of the Chapter 7 case because they generally don't receive anything in return for their investment."
Diversification is key
If a company you've invested in goes bankrupt, you could lose most or all of your investment. That's why financial advice always preaches the importance of a diversified portfolio and not investing too heavily in a single company.
A good rule of thumb is to have at least 25 to 30 companies in your portfolio to reduce risk. It's never fun when a company in your portfolio declares bankruptcy. But it's much easier to handle if that's 1 of 30 companies and not 1 of 4 or 5 companies.
Building a diversified portfolio can be time-consuming, and that's why many people choose investment funds. These invest your money in a large number of stocks for you. Instead of needing to pick stocks yourself, you can pick one fund that invests in hundreds of them. A few of the most popular types of investment funds are:
- Exchange-traded funds (ETFs)
- Mutual funds
- Target-date retirement funds
You can find plenty of these investment fund options at any highly rated stock broker. They're an easy way to invest, and a great way to ensure that even if a company goes bankrupt, it won't have too much of an impact on your portfolio.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
FAQs
In the event you own stock of a company that files Chapter 7 bankruptcy, it will likely become worthless and it is unlikely you will recover any of your investment (see Banks and bondholders first sidebar).
What if you have stocks in a company that goes bankrupt? ›
When a company files for bankruptcy protection, chances are its shares will lose most—if not all—of their value, and that the company will be delisted from its exchange. That's bad news for shareholders.
What happens if you buy a put on a company that goes bankrupt? ›
What Happens To Put Options During Bankruptcy? If you own put options on stocks of a company that has just declared or filed for bankruptcy, you are in for a huge reward. The delivery and settlement of every stock option is guaranteed by the OCC, Options Clearing Corporation, in the US Market.
What happens if you are a shareholder and the company goes bankrupt? ›
If a company declares Chapter 11 bankruptcy, it is asking for a chance to reorganize and recover. If the company survives, your shares may, too, or the company may cancel existing shares, making yours worthless. If the company declares Chapter 7, the company is dead, and so are your shares.
What happens to investors money when a company fails? ›
In that instance, whatever cash is in the business following the sale of assets and the payment of any liabilities the business may have, proceeds will be divided amongst the shareholders on a pro-rata basis. In most instances when a business fails, investors lose all of their money.
Do I lose my money if a stock is delisted? ›
Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.
Do you get your money back if you invest in a company and it goes bankrupt? ›
It makes sense, because when you invest in a company, you effectively own a share of it. As such, you benefit much more than its creditors if the company is successful. This also means you take on more risk. While it's theoretically possible that you get some money back, it's highly unlikely.
What to do when a company you invested in goes bankrupt? ›
In addition to maintaining ownership, another choice for an investor who owns shares of a company that has declared bankruptcy is to attempt to sell the shares—likely at a significant loss relative to the initial investment.
Do shareholders lose everything in Chapter 11? ›
A corporation exists separate and apart from its owners, the stockholders. The chapter 11 bankruptcy case of a corporation (corporation as debtor) does not put the personal assets of the stockholders at risk other than the value of their investment in the company's stock.
Can you get your money back if a company goes bankrupt? ›
Though the bankruptcy of a company to which you've sold goods or provided services is never great news, it's often possible to get back at least some of what you are owed. Doing so requires you to file a proof of claim promptly, so the trustee overseeing the payment to creditors can put your receivables in the queue.
Shareholders also enjoy certain rights such as voting at shareholder meetings to approve the members of the board of directors, dividend distributions, or mergers. In the case of bankruptcy, shareholders can lose up to their entire investment.
What happens to my stock if a company gets bought out? ›
If it's an “all-cash” deal, your shares will vanish from your portfolio upon closing, replaced by the specified cash value. Conversely, if it's an “all-stock” deal, your shares will be swapped for shares of the acquiring company.
What happens if a company you own goes bankrupt? ›
In a business Chapter 7 bankruptcy, the business is closed, all assets are liquidated by the bankruptcy trustee, and the proceeds from the business assets are paid out to the business's creditors.
What happens if you invest in a business and it fails? ›
Although it depends on the terms of your initial investment, in the case that a company you have invested in fails, you will not get your investment back.
Do investors get money back if the company fails? ›
If a startup shuts down, investors will only be able to recoup their money if they invested in a "safe." A safe is a type of investment that is designed to protect investors from losses if the startup fails.
What happens to my money if my investment company goes bust? ›
Typically, when a brokerage firm fails, the Securities Investor Protection Corporation (SIPC) arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. If the SIPC is unable to arrange the accounts' transfer, the failed firm is liquidated.
What happens to stock if company goes bust? ›
If you bought stock before the company suspends trading, the idea's the same. The contract still holds and you'll still get your shares. Your money has been paid, you'll receive the stock (but won't be able to sell it) and you'll get any value that comes to shareholders out of the administration process.
Do I lose my stocks if my brokerage goes bankrupt? ›
However, should your firm cease operations, don't panic: In virtually all cases, customer assets are safe and typically are transferred in an orderly fashion to another registered brokerage firm. Multiple layers of protection safeguard investor assets.
What happens to shareholders if a business fails? ›
Shareholders and liquidation
The shareholders will only get paid any return on their shares in an insolvent liquidation after all creditors get paid in full. If shareholders also have a claim as a creditor, then they may receive a payment as a creditor (separate from any return on shares).
