Whenever a company’s stock goes bankrupt and becomes worthless, many investors wonder if they will be responsible for that. The general answer to that question is no, but in different circumstances, the answer can be different.
If the investor uses margin
If an investor uses a margin in his brokerage account, meaning he or she borrows against the stock in his or her account. In that case, the investor is responsible for repaying the debt, even after the account has gone to $0.
For instance, if you owned stocks worth $90,000 and borrowed $35,000 against your share. Then, you still owe that $35,000 when the company goes bankrupt.
Usually, before the company goes totally bankrupt, like when your shares fell to $45,000, your broker will call you. Your broker will ask you to put more money into your account, commonly known as a margin call.
But if you do not comply, your broker usually will sell your stock to repay your debt and to protect their brokerage firm.
If the investor has no margin debt and the shares are non-assessable
You will not owe anything in any case of company bankruptcy if your brokerage account has no margin debt. There will be a phrase ‘fully paid and non-assessable’ somewhere in the stock certificates owned by the investor.
Even if it is rare, there is a company with assessable shares. That companies have the ability to come to the shareholders ask them some amount of money.
Assessable shares were popular in the 19th century as a way for the management to raise funds for their expansion. Most of the time, the stocks in a private company or limited liability company use assessable stock.
So, if you invest in those companies, you have to consider getting a copy of the Operating Agreement or Articles of Incorporation. They are the legal documents that lead your stake in the company.
Also read: 3 Ways to Buy Stock without a Broker
The Processing Request of worthless securities
Once a company got delisted from a stock exchange due to bankruptcy, then the investors have to fill out a worthless securities processing request.
For this service, your broker will charge the investor around $5 to $10 fee. They will, later, remove that worthless shares from the account.