Pass on the cheap shares of a company in bankruptcy, however heavily they trade. Shareholders are paid last, after lenders, bondholders, suppliers, and employees, and the reorganization plan usually cancels the old stock. If a company you own files for Chapter 11, count your shares as a likely total loss.
The heavy trading is what draws people in. A filing knocks the price down, volume jumps, and one hopeful headline can send the shares sharply higher in a day.
Those swings are traders guessing at an outcome that’s rarely in doubt. Under bankruptcy’s absolute priority rule, shareholders get nothing unless every creditor ahead of them is paid in full or agrees to give something up. Companies file because they can’t pay what they owe, so the creditors usually end up with the reorganized company’s new shares, and the plan cancels the old ones.
General Motors shows how it plays out. GM filed for Chapter 11 on June 1, 2009, and a new company bought its business that July. The old shares traded on as MTLQQ under the renamed Motors Liquidation Co., and its Chapter 11 plan canceled them in March 2011, with no payout expected for shareholders. The new GM’s stock reached the market in a separate initial public offering in November 2010.
Whether you’re eyeing a stock like that or already own one, three signs say where it’s headed:
- The NYSE or Nasdaq delists it, and the shares move to the over-the-counter market.
- A Q appears at the end of its ticker symbol, the marker for a company in bankruptcy.
- The company’s proposed reorganization plan cancels the existing shares. Companies report on their cases in 8-K filings, which you can search on the SEC’s EDGAR site.
Buying on the bounce is a bet that your company becomes the rare exception. Hertz’s 2021 exit plan paid every creditor in full in cash, and that’s what left more than $1 billion in value for its old shareholders. Few bankrupt companies can pay their creditors in full.
If you believe in the comeback, buy the new shares after the company emerges, the way investors bought into GM in 2010. Shares with a Q on the ticker are a claim on whatever the creditors leave behind.
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