What types of bankruptcy are there?
Under the US Bankruptcy Code, there are actually 6 types of bankruptcy. But for companies, two matter most: Chapter 7 and Chapter 11. The name "Chapter" just refers to specific chapters of the US Bankruptcy Code — the legal rulebook for what happens when a company can't pay its debts.
Chapter 7 — The End of the Road. The company shuts down immediately. A court-appointed trustee sells off everything — equipment, buildings, intellectual property, all of it — to pay back as much debt as possible. Once everything is sold and distributed, the company ceases to exist. No second chances. No coming back. This is always a company's absolute last resort.
Chapter 11 — The Second Chance. Instead of shutting down, the company gets a chance to reorganize. A committee reviews the finances, cuts costs, renegotiates debts, and builds a new business plan — all while the company keeps operating. The goal: come out the other side as a healthier, leaner version of itself.
In 2021, GameStop was a struggling retailer most people assumed was dying. Instead of collapsing, they used the attention from the Reddit meme stock craze to raise money, pay off debt, and reinvent the business. They didn't file for Chapter 11 — but they went through the same kind of restructuring on their own terms. That's the Chapter 11 mindset: instead of dying, you fight back.
But here's the honest reality check: most companies never fully recover. And even when they do, existing shareholders often get severely diluted — new shares are issued, old ones lose most of their value, and you walk away with far less than you put in.
Who gets their money back first?
There's a strict legal order called absolute priority for who gets paid first. Think of it like a queue — and as a shareholder, you're at the back.
Secured creditors are like a friend who lends you money but says: "I want your bike as a guarantee." If you can't pay them back, they take the bike. They take the least risk — and get paid first.
Bondholders lent the company money and received regular interest in return. More risk than a secured creditor, but less than a shareholder. Second in line.
Shareholders have the biggest potential upside — a rising stock price — but also the biggest risk. In most bankruptcies, by the time everyone else is paid, there is nothing left.
You might get a few cents on the dollar. Or nothing at all. This isn't unfair — it's the deal you signed up for as a shareholder. Greater potential returns, greater risk. That's always been the trade-off.
What are your rights as an investor?
Right #1: You have the right to be informed. Publicly traded companies are legally required to disclose when they file for bankruptcy. In the US, filings are published on the SEC's website — free and publicly accessible. The moment a company files, it's public. No excuse for being caught off guard.
Right #2: You have the right to file a claim. Even as a shareholder, you can submit a proof of claim — a formal document stating how many shares you owned and what they were worth. Will you get money back? Probably not. But in rare cases where leftover assets remain after everyone else is paid, it counts.
Right #3: You have the right to vote — in Chapter 11. Creditors and sometimes shareholders get to vote on the proposed reorganization plan. The court needs majority approval before moving forward. This is your actual chance to have a say.
Right #4: You have the right to legal representation. You can hire a lawyer to represent your interests. In large bankruptcies, shareholder committees are sometimes formed — a group that collectively represents investors in court. Individual investors can join.
Never put all your money in one stock, and never invest based on hype alone. The best investors aren't the ones who never lose money — they're the ones who understood the risk before they even bought the stock.
- Chapter 7 = full shutdown. Everything sold. Shareholders almost never see a cent.
- Chapter 11 =reorganization. Company tries to survive. Shareholders still at the back — and often wiped out even if the company makes it through.
- As an investor you have rights — to be informed, to file a claim, and in some cases to vote. But rights don't guarantee money back.
- The best protection: never put all your money in one stock, and never invest based on hype alone.