Chapter 11 Bankruptcy

• A corporate filing of Chapter 11 bankruptcy presents the lesser of the bankruptcy evils for a shareholder. In a Chapter 11 bankruptcy, the company reorganizes its finances to pay off as much of the debt as possible but remains in business. The Chapter 11 filing, as Investopedia explains, "gives the debtor [i.e., the corporation] a fresh start, which depends on the debtor's fulfillment of obligations under the reorganization plan."
  
  Under a Chapter 11, the company may sell assets to pay off debts or reallocate money from various funds. The corporation is then in a position to attempt to become profitable again. If the reorganization does not succeed, however, the corporation liquidates all of its assets, and shareholders are paid off after, and only after, creditors.
  
  When a corporation is facing a declaration of bankruptcy, the shareholder's stock prices will inevitably decline. If the corporation files a Chapter 11, then the shareholder may receive the option of trading in his existing stock for the new company's stock that will be based on the reorganization. At least initially, this new stock will be worth far less.
  
  

Chapter 7 Bankruptcy

• If a corporation files for a Chapter 7 bankruptcy, the outlook for the shareholder is even worse. Unlike a Chapter 11 bankruptcy, a Chapter 7 bankruptcy means that the corporation is "going under," or shutting down completely. At that point, the corporation's first and foremost priority is paying off its creditors any way it can.
  
  While shareholders enjoy some priority in getting their investment back under a Chapter 11 bankruptcy, under a Chapter 7 they are extremely low on the list when it comes to being paid back on their initial investment. In fact, in addition to probably losing the investment entirely, the shareholder may be held partially responsible for the corporation's debt.
  
  According to the Bankruptcy Law Network, shareholders of a corporation filing for a Chapter 7 bankruptcy can face liability for the corporation's debt and, in some cases "there is a risk that shareholders can be held liable for the entire debts of the corporation."
  
  The Bankruptcy Law Network explains that "the trustee can also sue to collect loans the corporation made to the shareholders, or to recover loan payments made to them in the year or more prior to bankruptcy."
  
  

The Fine Print

• It is important to note that a corporation that is filing for a Chapter 7 bankruptcy has no legal obligation to notify the shareholder, as Lawyer.com explains. Once all of the creditors have been paid, shareholders can file suit to get their share of any money left over.
  
  

Bankruptcy and Personal Credit

• A corporation is a separate legal entity from the individual who owns shares in it, so usually a corporation's bankruptcy will not affect the shareholder's personal credit. Exceptions to this, however, include when the shareholder has agreed to be personally liable for the corporation's debts or sometimes when the shareholder is part-owner.
  
  

Personal Bankruptcy and the Corporation

• If a shareholder must declare personal bankruptcy, this will not affect the corporation's financial standing, although the value of the shares will be considered part of the individual's assets and may be liquidated to pay off creditors.