Bankruptcy - Stock Trading Terms

Bankruptcy is a legal process that occurs when a company is unable to pay its debts and obligations as they become due, resulting in the company's financial distress and potential insolvency. In stock trading, bankruptcy can have a significant impact on the value of a company's stock, as the announcement of bankruptcy can cause a significant drop in the stock price due to the potential for the company's assets to be sold off to pay its creditors, leaving little or no value for shareholders. However, it is important to note that not all the bankruptcies result in the complete dissolution of the company, and some companies may be able to reorganize and emerge from bankruptcy as a stronger entity. Stock traders need to closely monitor the financial health of the companies in which they invest to avoid significant losses due to bankruptcy. Often when a talk about bancrupcy is ongoing, Chapter 11 is mentioned.

Here are some examples of large bankruptcies in the US stock market:

Enron: In 2001, Enron, which was once one of the largest energy companies in the world, filed for bankruptcy after it was revealed that the company had been involved in accounting fraud.

Lehman Brothers: In 2008, Lehman Brothers, a global financial services firm, filed for bankruptcy due to its exposure to the subprime mortgage market and the resulting financial crisis.

General Motors: In 2009, General Motors, one of the largest automobile manufacturers in the world, filed for bankruptcy due to a combination of factors, including declining sales and high labor costs.

WorldCom: In 2002, WorldCom, a telecommunications company, filed for bankruptcy after it was revealed that the company had inflated its earnings by over $11 billion.

Toys "R" Us: In 2017, Toys "R" Us, one of the largest toy retailers in the world, filed for bankruptcy due to increasing competition from online retailers and a heavy debt load.

These bankruptcies had significant impacts on the stock market and the broader economy, as they resulted in job losses, investor losses, and a general sense of instability and uncertainty.

If a stockholder holds stock of a bankrupt company, they can expect to receive a portion of the proceeds from the liquidation of the company's assets. However, it is important to note that shareholders are usually last in line to receive payment after all creditors and bondholders have been paid. Therefore, the amount that shareholders receive may be significantly less than the original value of investment, and in some cases, they may receive nothing at all. In some instances, shareholders may also receive shares of the reorganized company if it emerges from bankruptcy, but this is not always the case. It is important for shareholders to closely monitor the bankruptcy proceedings and consult with a financial advisor or legal professional for guidance.