question for stock guru

[Detroitpilot22]

If a company like NWA is in bankruptcy and is issuing stock NWACQ what happens when they come out of bankruptcy, do they reissue it, or if you bought NWACQ would you be in for some profits if the stock went way up?

 

[radarlove]

The stock gets cancelled, you get nada.

The bondholders are changed into stockholders and get new stock (not the stuff you bought while they were bankrupt).

New stock is floated on the market.

Now the question is, "Why does a stock that is going to be cancelled sell for anything at all?" and although academics argue about it, I suspect for the same reason people go BACK to Vegas and keep playing the slot machine.

For some reason, mostly speculation, but also to cover short interest, there is active trading in the stock until the judge hits the gavel and the company emerges from bankruptcy. At that point, the stock just disappears from the trading screens, never to be seen again.

Go ahead and buy a bunch. Let us all know how it turns out.

 

[Detroitpilot22]

i know nothing about the stock markey, hence the reason i asked

 

[Contract]

Hope this Helps. Good luck in the market.


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When Good Stocks Go Bankrupt

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By Ann Coleman (TMF AnnC)
October 24, 2001
Q. What happens to a company's stock after it declares bankruptcy? If I own stock in a bankrupt company, what are my options? --A.M.

A. Options? You may have options, but then again, you may not. It depends on what type of bankruptcy the company has filed. Some companies continue to trade right through a bankruptcy and emerge later with stock that is actually worth something. That's a Chapter 11 "reorganization" type of bankruptcy where the company is still a going concern.

In a Chapter 11, the company continues to operate while it attempts to work out a solution to its debt problems. (This is similar to Chapter 13 bankruptcy, which applies to individuals.) The company files a reorganization plan that must be approved by the bankruptcy court, and is protected from its creditors while the reorganization is taking place. With luck the company will return to profitability under the reorganization plan.

That doesn't always happen, of course, but as long as a resurrection is considered possible, a bankrupt company may continue to trade. The Nasdaq and the New York Stock Exchange may "delist" a company that is in serious financial trouble and/or no longer meets their minimum listing requirements, but if the company is still doing business it can trade "over the counter." Bankrupt companies trading on the Nasdaq exchange have the letter Q added to their stock symbols.

So in a Chapter 11 bankruptcy, you do have options. You can sell your shares in the bankrupt company and take your tax loss (more about that later), or, if you think that the bankrupt company has a good chance of getting back on its feet, you can hold your shares in hopes that the return to profitability will be swift. (There isn't much point in holding if you expect that the return will be slow -- i.e., that your investment will return less than the market as a whole.) I don't recommend holding unless you have sound reasons for believing that the company will bounce back from bankruptcy quickly.

While a Chapter 11 bankruptcy offers little hope for the investor, a Chapter 7 bankruptcy offers none. Chapter 11 cases that cannot be resolved can be converted to Chapter 7, or a company can file for Chapter 7 bankruptcy directly when reorganization is not a viable option. In Chapter 7 a trustee is appointed to oversee the liquidation (sale) of all of the company's assets and the distribution of the proceeds to the company's creditors.

There are strict rules about how the money is distributed. As a shareholder you are the owner of the company and entitled to any value left over after all other debts have been discharged. That's usually not much. In fact, it's usually not anything. Secured creditors get paid first (banks, mortgages, etc.). Unsecured creditors, including bondholders, are next. Shareholders are last on the list. They stood to make the most if the company were successful, so they lose the most when it is not.

While all this is happening, either the company or your broker will inform you of the company's moves, so you won't be in the dark.

If a company you own stock in declares a Chapter 7 bankruptcy, you don't have much in the way of options. The only good news is that you get a tax deduction -- and that really isn't such terrific news. The procedure for claiming the loss is the same as if you'd sold the stock, except that you use the last day of the year in which the stock became worthless as the sale date, and you write "worthless" for your sale price. Your capital loss will be equal to the cost of the stock including commissions. This loss will be used to offset any capital gains you may have had that year.

If you end up with a net capital loss on all stock transactions for the year, up to $3,000 of that loss can be used as a tax deduction against your regular income. If the total capital loss is greater than $3,000, it can be carried forward year after year as a $3,000 deduction against each year's taxes until it is used up. The end result is that you can get back from 10-38% (depending on your tax bracket and the year you claim the loss) of the price you paid for the stock.

Tax deductions are always nice, but really, there are better ways to get them. And if you are holding the bankrupt stock in an IRA, you can't deduct your loss at all. (No capital gains, thus no capital losses.) All that boring financial stuff we Fools keep prattling on about -- debt ratios and profit margins and burn rate -- it's there to help you spot the warning signs before a company gets into deep trouble.

Ann Coleman learned about corporate bankruptcy following the adventures of Lernout & Hauspie Speech Products, a company she bought 10 shares of because she liked the idea of owning a speech recognition company with the stock symbol LHSP. It's now LHSPQ, Other stocks she owns can be viewed in her personal profile. The Motley Fool is

 

[Contract]

Basically, if you believe the company is going ot come out of bankruptcy then this could be a bargain price to buy at. However, if it does not make it out of bankruptcy then you loose your money.

 

[J32driver]

Basically, if you believe the company is going ot come out of bankruptcy then this could be a bargain price to buy at.

NOPE! Once an airline is enters CH.11, its a forgone conclusion the stock will be worthless. The airline will issue new stock when it exits CH11 and the old disappears. Exactly like Radarlove said in the 2nd post.

 

[igneousy2]

NOPE! Once an airline is enters CH.11, its a forgone conclusion the stock will be worthless. The airline will issue new stock when it exits CH11 and the old disappears. Exactly like Radarlove said in the 2nd post.

Not true...Hawaiian Airlines emerged with their stock in tack. It usually ends up that way but it is not an absolute.

 

[SNOWBUM]

it depends on what the DIP finance creditors agree too. UAL issued new stock and the old one became worthless, so did AAWWH( atlas-polar) and they came out of BK in 3 months.
most of the time Dip finaceers and other big creditors ( bank and leasing companies) want new stock issue wich they distribute 100% among themselves, then, after the company has shown somw profits, they hire a brokerage company to take them public and make big $$$.

airlines make $$$ for the big institutional investors and brokerage firms that do the IPO's and Bond issues when they go up and down, but not when things go steady. you will get burn if you buy any airline stock while in BK if you are not an institutional investor.

 

[Newjetjockey]

I'm pretty sure UsAir was worthless after emerging....TWICE. Can someone confirm?

 

[PCL_128]

I'm pretty sure UsAir was worthless after emerging....TWICE. Can someone confirm?

That's correct. USAir issued new stock and the old shares were absolutely worthless. This isn't a good gamble unless you have lots of money to throw away.