What happens when a company you own shares in files for Chapter 11 bankruptcy protection? How do you determine whether you have a total loss for tax purposes?
When companies spot the grim reaper in their rear-view mirror, they can file for Chapter 11 bankruptcy protection. This allows them to continue operating while a trustee is appointed to develop a plan to turn the company around. If you think the company will get its act together, you might want to hang on to those shares -- but that's frequently a bad thing to do. If you're skeptical or have a better place to invest the money (and it can be hard to not have a better place to invest than in a bankrupt company), you should definitely consider selling. Roughly half of the companies that file for Chapter 11 protection ultimately recover -- but, very often, shareholders of common stock end up with nothing or just pennies on the dollar.
With any stock holding, you never have a tax loss until you actually sell the shares. Up to that point, the loss hasn't technically happened yet and is called a "paper loss" (though the sleepless nights it may cause are very real).
Learn much more about how bankruptcy works in this article by Bill Mann.