What Happens When Public Companies Declare Bankruptcy?


Declaring bankruptcy has significant effects on a public company, including severe consequences for its investors. This decision is often derived from cripple debt that the public company cannot pay back under the current terms of agreements. Hence, declaring bankruptcy is the only way for the company to save itself and start running again after facing some considerable losses.

How Do Companies Declare Bankruptcy?

Federal bankruptcy laws determine ways to deal with a business that has declared bankruptcy and governs how the debts of a business will be divided. The two types of bankruptcies that businesses can file for are Chapter 7 and Chapter 11 bankruptcy.

Chapter 7 bankruptcy allows businesses to conduct a “going out of business sale” to generate money so that the company’s debts can be paid off. Chapter 11 bankruptcy, on the other hand, is when a company wants to reorganize its business and categorize the debt so that it can survive and introduce a new business model. If a company files for this kind of bankruptcy, it is allowed to run the day-to-day business but needs the bankruptcy court’s permission to make significant business decisions.

What Happens to the Company’s Stock?

Regardless of the type of bankruptcy that a company chooses to declare, their current stock becomes useless. This is because the common stock, also known as the equity in a company, does not receive much in the bankruptcy proceeding. Creditors, such as bondholders, suppliers, and employees need to be dealt with before the common stockholders.

You might have noticed the “Q” placed on a ticker symbol. This shows that the company is going through bankruptcy proceedings. It is seen as an end mark to investors as even if the company manages to reorganize, its plan automatically cancels all existing shares of common stock. Even after the new stock is issued, the company’s reorganization plan will trade without the “Q,” but the old stock will still retain the “Q.” This often confuses the investing public.

How Stock is Traded After Bankruptcy

As mentioned above, a company can still trade its common stock despite filing for bankruptcy. However, they are often unable to meet the listing standards of important exchanges. Hence, they are required to go to the OTC Markets along with the “Q” attached to their ticker symbol.

It is important to keep in mind that the federal law does not prohibit a company from trading just because it is in the midst of bankruptcy proceedings.

Investing in a Bankrupt Company

Some investors may want to buy or hold the bankrupt company’s common stalk thinking that the company may reemerge, and they would be able to gain the rewards.

However, this is not a smart move. There is no indication that old investors receive any benefits from the organization. In fact, they may incur losses as the old common stock depreciates and holds no real value. The priority scheme set by the federal bankruptcy laws determines that bondholders are to be paid before stockholders because the holders of common stock are at more risk.

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Can Declaring Bankruptcy Discharge Your Tax Debt?

If you fail to pay taxes on your earned income to the Federal or state government, you incur tax debt. Unpaid tax debt can result in the individual facing harsh penalties from the IRS or even jail time. If you are unable to bear the burden of your incurred tax debt, could declaring bankruptcy help discharge it? The short answer – yes, it is possible. The long answer however, is a lot more complicated. Continue reading to know why.

Eligibility for Tax Debt Relief

In order to qualify for a tax debt discharge, there are 5 elements you satisfy under the Federal law:

The 240-Day Rule

The “240-day rule” implies that your tax debt must have been assessed by the IRS at least 240 days before the day you file for bankruptcy. This duration may be extended in case of any past suspension of tax collection by the IRS.

Tax Debt Must Be at Least Three Years Due

To be discharged, the said tax debt must be at least 3 years due before the day you file for bankruptcy.

You Must Have Filed a Tax Return

Without filing a tax return on the tax debt you owe, it is virtually impossible to get a discharge. Furthermore, the tax return filing must be at least 2 years old before you can declare bankruptcy on your tax debt.

No Case of Willful Attempt at Taxes Evasion

If the court deemed you to have committed fraud or willfully evaded taxation, then you are barred from getting a discharge of your tax debt.

The Taxes Are Income Taxes

Lastly, only income tax debt is liable for discharge under bankruptcy. Property, payroll, penalties, and any other tax, apart from income, cannot be wiped out by declaring bankruptcy.

As you can see, getting a discharge on your tax debt is technically possible, but the conditions are rather stringent and may disqualify quite a few cases of tax debts. However, there is another catch worth discussing that may prevent you from fully eliminating the specter of your tax debt.

The Additional Catch

A discharge does not eliminate any past tax liens recorded by the IRS on your property before you filed for bankruptcy. To sell the said property, you will first have to pay up to the IRS.

Seek the Help of a Legal Attorney

Because bankruptcy laws can be complicated to understand, it is best to seek the aid of a legal attorney who can give better advice you on how to go through with your bankruptcy case, and eliminate your tax debt. For a free consultation with an experienced lawyer, book an appointment with us online or call 512-640-3340.

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