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Chapter 1. Sages and Charlatans: Avoidin... > Red Flag 11: A Company Files for Cha...

Red Flag 11: A Company Files for Chapter 11 Bankruptcy Protection

Stockholders almost always get wiped out when a company declares bankruptcy because debt holders get paid off first. This requirement often means that when a company goes into liquidation, there is nothing left with which to pay stockholders. When a company reorganizes under Chapter 11, the creditors will often end up owning most of the equity, leaving the previous stockholders with a much smaller stake, or even no stake at all. So, if you own shares in a company and there is speculation that it is going into bankruptcy, it is probably best to bail out. Waiting until an announcement of a bankruptcy filing to sell your shares will be leaving it too late. The speed with which companies such as Enron Corp. and Kmart Corp. went into bankruptcy in December 2001–January 2002 caught many investors by surprise, though in both cases there was enough time to get out if people had taken note of some of the warning signals detailed in this book.


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