A company may decide to declare bankruptcy when it suffers from crippling debt. Federal bankruptcy laws govern how the assets and business of a company will be used to clear its debts.
There are two types of bankruptcy available to companies (Chapter 7 and Chapter 11), but regardless of the type of bankruptcy a company files under, any common stock in a bankrupt company is likely to be worthless. That is because the common stock (that is, “equity”) is the last in line to receive what’s available to be distributed in a bankruptcy proceeding.
Creditors, including bondholders, suppliers and employees, all come before holders of the company’s common stock. And, even if a company successfully reorganizes, its plan of reorganization often cancels the existing shares of common stock.