A stockholder would probably opt for a higher percentage of debt than the bondholder in a firm's capital structure. Yet, a company that is highly leveraged is also very risky for a stockholder. When a firm becomes over leveraged, bankruptcy can result. Read on to learn more about this dreaded occurrence. Top Bankruptcy Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer meet its financial obligations.
Bankruptcy is a result feared by both stock and bond investors.
When bankruptcy occurs, stockholders of a corporation can only lose the amount they have invested in the bankrupt company. This is called Limited Liability. The stockholders' liability to creditors is limited to the amount invested. Therefore, if a firm's liabilities exceed the liquidation value of their assets, creditors also stand to lose money on their investments. When bankruptcy occurs, a federal court official steps in and handles the payments of assets to creditors.