However, this is not always the case. As evidenced by the 2008 economic crisis, many corporations mismanage their finances, resulting in bankruptcy. Corporate bankruptcy frequently impacts the company, its stockholders, and the general public. Individuals who own stock in bankrupt companies may lose their money indefinitely if the companies declare bankruptcy.
This is the case when a company declares bankruptcy under Chapter 7. Chapter 7 requires businesses to cease operations and liquidate their assets in order to repay their creditors. Any remaining capital is typically distributed to stockholders in the form of dividends. These dividends are typically a small portion of the initial investments.
Not all corporations contemplating bankruptcy follow this course of action. By declaring Chapter 11 bankruptcy, many corporations reorganize and remain in business. Under Chapter 11, the company is required to dispose any non-essential assets. The stockholders of Chapter 11-bankruptcy companies retain their shares, despite the price of the stock frequently falling dramatically. Thankfully, the stock price could eventually recover, although the process could take years.
Companies that fail to restructure adequately may be forced to revert to Chapter 7. When this occurs, individuals typically lose their investments, just as if the company had declared chapter 7 at the outset.""
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