Editor's note: This is the first article in a new series called "Ask the Expert," in which our reporters talk to the experts in their field for answers to questions on a variety of sectors, companies and issues affecting the market. Got a question you'd like us to track down? Email us at
Question: What happens to my common shares when a company goes into bankruptcy? If you own shares in a company that goes bankrupt, there's an excellent chance your stock will end up worthless. While there are exceptions to this rule, it's something that investors often misunderstand, in part because companies themselves many times emerge from Chapter 11. It's the common stock that almost never survives. A company declares bankruptcy because it owes more than it can pay. To extricate itself from this, it works with banks and other creditors to create what can be thought of as a new company that doesn't owe as much money. Almost always, that company is one that current shareholders won't own shares in. "Our experience is that you get very little return on equity after bankruptcy," said Chris Stuttard, editor of BankruptcyData.com, a clearinghouse for corporate bankruptcy information. "Look at it like this. It was one company going in and becomes a brand-new company when it comes out. And more often than not, the company will decide to cancel the old common stock." This is because when it comes to getting paid back, equity stakeholders are last in line, trailing banks and debt holders. This makes trading in potential bankruptcy cases -- an airline, for instance -- a particularly risky proposition, since the downside could very possibly be everything. Consider the case of US Airways, which entered bankruptcy last year and re-emerged as a new entity at the end of March. A year ago, US Air shares were trading on the New York Stock Exchange as the company teetered into bankruptcy. After the company declared Chapter 11, the shares moved below $1 and were delisted, but still traded as over-the-counter shares as recently as March. Once the company left the protection of bankruptcy, whatever stake you owned instantly became worthless -- the company's old stock price is $0 and it isn't listed anywhere.