Stock Market Information

So, the big talk of the markets right now is the recent collapse of Lehman Brothers and the possible demise of AIG as well. What exactly happens when a company files Chapter 11, though? More importantly, what happens to the existing shareholders in the case of bankruptcy?

The reason you see huge drops in the share price of companies that are approaching filing for chapter 11, such as the 94% drop in Lehman Brothers or the huge drop in AIG shares, is that in case of bankruptcy, you’re lucky to get anything at all in exchange for the shares you hold in the company. Take Enron or Kmart, for example. When they filed for bankruptcy, their shares were worth pennies. Kmart managed to get back on it’s feet in a different form, but the original shareholders got next to nothing. Many investors consider throwing money as a speculative investment into a company liek AIG on the offchance that they don’t file for bankruptcy, but it’s a risky proposition.

Chapter 11 is when the company hopes to continue operations by reorganizing and hopefully re-emerging at some point. If there’s no hope of that happening, the company will go to chapter 7, where the company will be liquidated and the proceeds given to the creditors. Shareholders are at the bottom of the list when it comes to getting paid in this case.