What Happens If Your Stock Goes Bankrupt?

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What happens to stock when a company goes bankrupt or becomes practically worthless? One of the more frequent questions investors ask is whether they will be responsible or owe money. The answer? Probably not, but it depends. You might be on the line in certain circumstances.

What If You’ve Borrowed Against Your Stock?

If you have a brokerage account with margin capabilities, meaning you can borrow against the stocks in your account, you are responsible for repaying the debt, even if your entire account goes to $0. For example, if you owned $100,000 worth of a stock and borrowed $25,000 against your shares to buy a new car, you will still owe the $25,000 if the company stock goes bankrupt.

What would likely happen is when your shares fell to $50,000, your broker would call you and demand you deposit more money in your account (this is known as a “margin call”). If you didn’t comply, they would sell your stock to repay the debt to protect their brokerage firm.

What If I Have No Margin Debt and My Shares Are Non-Assessable?

If your brokerage account has no margin debt, then no, you won’t owe if the company goes bankrupt in virtually all cases. That’s because most stocks today are known as “fully paid and non-assessable.” If you have stock certificates, you’ll see that written somewhere on the shares.

There are a few companies that have assessable shares, although these are rare. With assessable shares, the company could come back to shareholders and ask them to send in money. Assessable shares were a way for management to raise funds for expansion in the 19th century, especially for railroad stocks. If more money was needed, the Board of Directors sent out a legal notice telling shareholders they had to send in $10, for instance, for every share they owned.

Shareholders were on the hook and had to send the company money, which was then used to operate the business, and they were given more shares. Private equity firms (which are nothing but hedge funds that specialize in buying private businesses) work much in this way today.

Stock in a private company or limited liability company, such as a family business, may not be non-assessable. In such cases, you should consider getting a copy of the Articles of Incorporation or the Operating Agreement, which are the legal documents that govern your stake in the company.

For example, it's not uncommon for older farmers in midwestern communities to own shares of a local bank that they purchased 40 or 50 years ago. The stock of the bank may have little or no publicly traded market. Here, you would need to seek out an experienced attorney and accountant to know whether you're on the hook in the event of a bankruptcy, especially if you happened to inherit these shares.

The Worthless Securities Processing Request

Once a company has been delisted from a stock exchange as a result of bankruptcy, you will often have to fill out a worthless securities processing request. Your broker might charge you a fee for this service, perhaps $5 or $10. They will take care of removing the now worthless shares from your account and handling the paperwork.