Corporate Bankruptcy and Your Investments

by Charles Rotblut, CFA

Corporate Bankruptcy And Your Investments Splash image

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.”

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.

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Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/charlesrotblut.


Discussion

Paul from Illinois posted over 2 years ago:

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.


Charles Rotblut from Illinois posted over 2 years ago:

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


Joseph from Kansas posted over 2 years ago:

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?


Bruce from California posted over 2 years ago:

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'.)


Ray from New Jersey posted over 2 years ago:

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)


Joseph from Pennsylvania posted over 2 years ago:

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.


Charles from Illinois posted over 2 years ago:

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


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