Excerpted from (OSC) Investor News. Bankruptcy may not be top of mind when buying shares, but it can happen to any company, especially during an economic downturn.

A company may become bankrupt or insolvent when it no longer has enough assets to pay off its debts. The company may try to restructure and come back in some form, or its assets may be liquidated and the proceeds distributed to its creditors according to bankruptcy and insolvency laws. In either case, you will likely get back little or nothing from your investment.

Under bankruptcy and insolvency laws, creditors such as governments, employees, lenders and debt holders are entitled to get paid before shareholders. Preferred shareholders generally rank ahead of common shareholders. However, by the time creditors get paid, there is usually nothing left for shareholders.

If the company restructures
The company may continue to operate while it comes up with a plan to get out of debt and reorganize itself. If the company is publicly listed, its shares may continue to trade. If the shares no longer meet the minimum requirements for listing on a major exchange, they may be delisted. The shares will likely be devalued and may trade on another market, which can be highly speculative. If the company does not meet its disclosure requirements, its shares may be cease traded entirely.

Under the plan, the company may issue new or additional shares to pay creditors and emerge as a restructured company. The shares of the old company are often cancelled. Sometimes, investors are able to exchange their shares in the old company for new ones, but this may be at a fraction of their original investment.

If the company is liquidated
If the company goes completely out of business, your shares will be worthless. The company will be required to sell off all of its assets to pay creditors. Shareholders are not considered to be creditors. It is highly unlikely that common shareholders, or even preferred shareholders, will get anything back.

Taxes and other costs
If you’ve lost money on shares, you may be able to use your capital loss to offset capital gains from other investments. Debt holders may be able to treat their losses as a loss against income. Before taking any action, you should consult with a tax advisor about your particular situation.

Your investment firm may charge a fee to remove a worthless stock from your account. If you bought your shares through a margin account, you are responsible for repaying the money you borrowed, even if your investment is worth nothing.

Protect yourself
Consider the possibility of bankruptcy when evaluating a potential investment. The OSC has some tips to help protect yourself from investing in a company that has potential to become bankrupt.