ASK KIM Get Out of Bankrupt Shares While You Can by Kimberly Lankford
I've owned Owens Corning stock since before it filed for bankruptcy protection. Its proposed reorganization plan says that the stock will be canceled at no value. Yet the shares are still trading and recently rose from 50 cents to about $4. Can I sell now? If I hold the shares, will my investment really become worthless?
If you want to guarantee you'll salvage some value, sell before the bankruptcy court issues a final order. In most Chapter 11 cases, the reorganized company issues new stock and the old shares are canceled.
That doesn't mean you will automatically be wiped out. Depending on the terms of the reorganization, you and other "old" common stockholders may be awarded some "new" shares. In theory, this might be worth waiting for because the new company starts fresh without all the debts and legal liabilities. But a windfall is a long shot. As a stockholder, you stand behind creditors, including bondholders, to claim assets.
Owens Corning filed for bankruptcy because of a barrage of asbestos lawsuits. The recent bounce in the stock's price rests on speculation that solid Republican control of Congress and support from President Bush raises the odds for a law to cap asbestos settlements. If so, Owens would presumably have more money left after it comes out of bankruptcy to compensate old stockholders.
A possible upside is that you could use your capital loss to offset capital gains in the year you sell the stock. Worthless shares can also be written off, but just because a company went bankrupt doesn't mean the stock is worthless. The IRS says that if there's any chance a stock can recover, it's not wholly worthless.
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