When it comes to getting paid back in Chapter 11 reorganization, shareholders are lowest on the totem pole. The companies’ creditors, who can include everyone from bondholders to suppliers, get higher priority.
Also, a company that seeks bankruptcy protection has probably done so due to its poor business decisions or because it’s no longer relevant to consumers. It’s about more than just a mounting debt load.
Bankruptcy may only temporarily solve a company’s problems
Even newly issued shares of formerly bankrupt companies often struggle to prosper after emerging from Chapter 11. After all, a healthier balance sheet doesn’t mean that a company has a better business model — especially in the notoriously cutthroat retail sector.
American Apparel, Fairway, Barneys and RadioShack are just a few examples of what some have dubbed Chapter 22 companies — firms that all were forced to file for bankruptcy a second time within a few years after emerging from a previous reorganization.
And then there’s camera and film company Eastman Kodak, the one-time tech and consumer giant that was a Dow component from 1930 to 2004, until it took too long to get aboard the digital photo revolution.
So while active traders may have the cash, and the stomach, to try to take advantage of short-term swings in bankrupt stocks like Hertz and JCPenney, long-term investors should probably think twice.