Corporate Bankruptcy and Your Investments
by Charles Rotblut, CFA
Bankruptcy creates tax challenges for investors, both shareholders and bondholders. Though the ideal situation is to sell a security before a company files for bankruptcy, once the bankruptcy process starts, investors need to make decisions about what to do with their securities. These decisions are often tied to assumptions based on incomplete information.
In the advent of bankruptcy, the interests of bondholders are favored over those of shareholders. Owners of common stock also see their interests take a back seat to those of preferred stock owners. However, holding bonds does not guarantee priority, as some bonds are “senior,” while others are “subordinate.”
In this article
Share this article
Facebook
Twitter
E-mail
SeekingAlpha
Stumbleupon
Delicious
LinkedIn
A bankruptcy can result in a reorganization or a sale of the company’s assets. Under a reorganization, bondholders may receive stock in the new company. Shareholders may see their ownership interests completely eliminated. Each bankruptcy is different. Investors need to read the provided documentation to determine what the company’s intentions are and how their stocks or bonds may be affected.
Once the bankruptcy is announced, investors have the opportunity to either sell their holdings or wait for the bankruptcy proceedings to be completed. Selling the security creates a formal capital loss (assuming the security was purchased above its post–bankruptcy announcement price). Waiting for the bankruptcy proceedings to be completed creates the potential to record the holding as “worthless” and claim an even larger capital loss.
To read more, please become an AAII Registered User or CLICK HERE.
Discussion
What about a stock that has been delisted due to required filings not being made and no prospect of when that might happen-ie., no market for the securit?: HQ SUSTAINABLE MARITIME INDS INC HQS.
posted about 1 year ago by Paul from Illinois
Paul,
If there is no trading activity in the stock, speak to your broker about getting an abandonment letter, which would allow you to treat the stock as if bankruptcy occurred.
If there is volume, you will have to sell your shares to realize a loss for tax purposes.
-Charles
posted about 1 year ago by Charles Rotblut from Illinois
I purchased a bond issued by Gm. Gm declared bankruptcy . The court allowed the labor union to get 18% of the new company while dis allowing any restitution for bond holders.I considered this to be a political pay off rather than a action. What doyou think?
posted about 1 year ago by Joseph from Kansas
I held on to my GM bonds thru the bankruptcy. In April, I received warrents for new GM stock, plus shares of new GM stock, amounting to about 35 cents on the dollar. The actual distribution data was April 27, 2011. (My 'bonds' were called 'debentures', roughly half of them were so-called 'senior notes'.)
posted about 1 year ago by Bruce from California
To clarify/expand on the Deadline for Filing paragraph: an amended return for the year the security became worthless can be filed within seven years from the date your original return for tha year had to be filed, or, if later, within two years from the date you paid the tax (per J.K.Lasser's)
posted about 1 year ago by Ray from New Jersey
Is it sensible to purchase a stock from a company that is in bankruptcy restructuring like AMR, under the hope of the company being purchased by another company. ie delta or usair.
posted about 1 year ago by Joseph from Pennsylvania
Joseph, that would be a highly speculative investment with no assurance that you would be rewarded for the level of risk involved.--Charles Rotblut, AAII
posted about 1 year ago by Charles from Illinois
