What happens when companies go out of business?


Quick Answer

When companies go out of business, they typically file for Chapter 7 bankruptcy, notes the Securities and Exchange Commission. A trustee sells off the company's remaining assets in an attempt to pay off debt to both creditors and investors. Secured creditors are first in line for debt repayments, followed by unsecured creditors and stockholders.

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Full Answer

Secured creditors take the smallest risk when investing in a company by negotiating for company assets as collateral. This makes them a priority in the debt repayment process, per the SEC. Unsecured creditors, such as bondholders, may receive a fraction of their bond's face value during this process. Stockholders are last in line and usually receive nothing.

If there is any money left to pay stockholders, their percentage ownership of the company determines how much they receive. For example, if a company has $10,000 to repay stockholders, someone who owns 1 percent of the company receives $100. Stockholders who own referred shares have first priority in this situation, states Investopedia.

Some companies may opt for Chapter 11 bankruptcy if they believe the business is salvageable, according to the SEC. The U.S. Trustee appoints a committee to oversee the process of clearing debt and restructuring the business. During this time, the company's stocks and bonds stay open for trading.

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