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Should you sell your stock in a bankrupt company?

By Jason Markum

Investing in the stock market is no bed of roses. And it can be even more difficult if a company you have invested in declares bankruptcy! Your gut instinct will probably tell you to sell your shares as soon as is humanly possible… but that may not be the right call to make and that’s exactly what I’m going to discuss in this article today.

If it seems likely that the company is about to declare Chapter 13 bankruptcy, then you should definitely sell your stock immediately because in a Chapter 13 bankruptcy the company is dissolved and the assets are sold and the money goes to pay back the bondholders and everyone else that has a claim to the company before a single penny goes to the shareholders… And there’s hardly ever any money left over once everybody else has been paid off, so you will not likely see a dime or even a penny as a shareholder.

If however, it looks like the company is going to declare Chapter 11 bankruptcy then it may be worth your while to stick around for a little bit and not sell your shares because it is possible that the company could turn itself around, at which time your shares could be worth more money.

There are ways to reduce your risk when dealing with a Chapter 11 bankruptcy. The best thing you can do is stay informed about everything, and I mean everything. Try to guess what the bankruptcy court is going to decide before they make their decision. If you guess correctly you stand to make a good amount of money back and save yourself a lot of heartache.

Of course, when the company actually goes into bankruptcy court you won’t be able to find out a whole lot of information because things will be sealed… but you can still make an educated guess or two.

Keep an eye on a few important things such as available cash flow. Just because the company is in bankruptcy court doesn’t mean that business has to stop, and many times companies will still have money flowing in with which they can continue to pay off some of their debt. As long as this continues to happen, the chances are very good that the bankruptcy court will allow this company to remain a viable entity into the future.

Sometimes a company will go bankrupt because of one bad division within that company while at the same time maintaining several other divisions within the company that continue to operate perfectly well. It’s these other good divisions and their cash flow that can often bring a Chapter 11 bankruptcy back into the light, as it were. So if your bankrupt company has this sort of thing going on, it may be a good indicator for you to stick around and wait it out.

Finally watch and see if the company tries to sell additional shares of stock as a way of raising money. This is a double edged sword because on one hand the companies ability to sell stock means that the investment community as a whole still has faith in the company… and that is a very good sign that things could turn around. On the other hand, whenever a company issues additional shares of stock, your original shares will become diluted in value.

So there you have several ways of determining whether or not you should sell your shares of stock in a company that is going through bankruptcy.

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