Bankruptcy Liquidation or Reorganization

• When a company files for bankruptcy, it simply buys time and breathing space -- a temporary reprieve from creditors so that it can sort out its finances. The two ways out of bankruptcy are liquidation or reorganization. In liquidation, company assets are sold off and creditor and investor claims are paid off in an established order of priority. In reorganization, the company may find a buyer or an investor who will provide the necessary cash infusion to save the company and allow it to emerge from bankruptcy as a viable concern.
  
  

Total Loss

• In liquidation, common stockholders are dead last in getting their claims repaid, behind bondholders and preferred stockholders. By the time it is the common stockholders' turn, there is usually no money left and they are completely wiped out.
  
  

Partial Loss

• In reorganization, the savior demands a large chunk of the company in return for the cash it provides. Everyone has to budge -- banks, bondholders, business creditors and stockholders. Debt is often restructured and new stock issued. Current shareholders experience substantial dilution -- that is, their stock holdings become worth much less than before. The company may also be sold to another company. If the buyer is a private company, the bankrupt company shareholders may receive cash for their shares; if the buyer is a public company, the bankrupt company shareholders may get their stock exchanged for that of the buyer's. But in any event the dollar amount they receive will be much less than their original investment.
  
  

Sell Before It's Too Late

• Companies don't declare bankruptcy overnight. Bankruptcy is a last resort, and companies try to avoid it as long as they can. So the road to bankruptcy is usually long and painful, reflected in a steadily declining stock price. You don't have to sit and watch your stock become worthless: You can always sell.