Many Americans own stocks in public corporations. Many of these citizens invest large portions of their wealth into these companies, with the trust that the companies will provide a stable and secure return on their investments.
Unfortunately, that is not always the case. As seen with the 2008 economic crisis, many corporations mishandle their money, which causes them to declare bankruptcy. Corporate bankruptcy affects the company, the stockholders, and, many times, the public at large. For those individuals who hold stock in the bankrupt companies, corporate bankruptcy may mean that their money is forever lost.
This is the case when a corporation declares Chapter 7 bankruptcy. Under Chapter 7, companies must cease operations and liquidate their assets in order to pay their creditors. In most cases, any leftover capital is distributed among stockholders in the form of dividends. These dividends are usually just a fraction of the individuals’ initial investments.
Not all corporations considering bankruptcy take this route. Many corporations restructure and remain in business by declaring Chapter 11 bankruptcy. Under Chapter 11, the corporation must sell any assets that are not essential to everyday operations. Stockholders of companies in Chapter 11 bankruptcy retain their stocks, though the stock price often falls dramatically. Fortunately, the stock price may eventually recover, though the process may take years.
Corporations that fail to adequately restructure may have to revert to Chapter 7. When this happens, individuals usually lose their investments, just as if the corporation had declared chapter 7 at the beginning of the process.