A company may decide to declare bankruptcy when it suffers from crippling debt.  Federal bankruptcy laws govern how the assets and business of a company will be used to clear its debts.

There are two types of bankruptcy available to companies (Chapter 7 and Chapter 11), but regardless of the type of bankruptcy a company files under, any common stock in a bankrupt company is likely to be worthless.  That is because the common stock (that is, “equity”) is the last in line to receive what’s available to be distributed in a bankruptcy proceeding. 

Creditors, including bondholders, suppliers and employees, all come before holders of the company’s common stock.  And, even if a company successfully reorganizes, its plan of reorganization often cancels the existing shares of common stock. 

Learn more.