In the first half-hour of trading today, Lehman Brothers (NYSE:LEH), which filed for Chapter 11 this morning, saw its shares drop 94% to somewhere in the neighborhood of $0.20. A year ago, shares traded for around $58.

And there are investors who are wondering right now if it would be worth throwing a few dollars at Lehman "just to see." After all, it's not to zero yet.

Stop right there
We've been here before: Enron, Kmart (which later merged with Sears Holdings (NASDAQ:SHLD)), Delta Air Lines (NYSE: DAL) -- all massive companies that filed for bankruptcy protection against creditors.

When they filed, their shares sold for only pennies apiece. And while Kmart and Delta were ultimately able to rise again in different forms, that didn't mean the original shareholders got anything. In fact, shares in both companies were canceled in the resulting deals.

Sure, Lehman's shares are exceedingly cheap right now, but you'd have to buy a bunch of shares for it to make a difference, and the chance of loss is still nearly 100%.

Look at it this way: Would you rather have more than 20,000 shares of Lehman for $4,000 or one share of Berkshire Hathaway (NYSE:BRK-B) for the same amount? The chance of Berkshire going to zero is next to nil; the chance of Lehman being anything but zero is just as remote. In the end, $4,000 is $4,000.

Buying shares of companies in bankruptcy is a bad idea, a monumentally bad idea. You're probably going to lose it all -- and here's why.

A rough bankruptcy primer
When companies file bankruptcy, what they're saying is that their assets are insufficient to cover their debt obligations -- and they'll go through every financial strategy possible before filing for Chapter 11. What can be confusing is that Chapter 11 is the vehicle companies use when they hope to reorganize and continue operations, to "emerge from bankruptcy." If the company can't generate enough capital to pay off its creditors, then it will slide down the scale to Chapter 7, complete liquidation.

Complicating matters slightly in this discussion as it pertains to Lehman Brothers is the fact that brokers are treated slightly differently from other operating companies. To protect their clients' assets, brokers are not allowed to declare Chapter 11 -- they go straight to Chapter 7. That's why the Lehman situation is still pretty fluid: It's trying to reorganize at its parent-company level while keeping its brokerage operations out of bankruptcy. Keep watching.

Mortgage company New Century ended up in Chapter 7; so did IndyMac Bank. In some cases the company may emerge, but it's quite rare for the shareholders to come along for the ride. That's because equity shareholders are quite literally the last people in line to receive something from the bankruptcy. They're behind the debt holders, behind the merchant creditors, behind the trustees, behind the employees, behind the tax man, and behind even the preferred shareholders.

Here's how Chapter 11 works: The bankruptcy filing can either be voluntary (filed by the company), or involuntary, in which companies holding credit claims can petition the courts to force the distressed company into bankruptcy. In Chapter 11, unlike Chapter 7, the debtor company remains in possession of its own assets, under the administration of a court-appointed trustee. The bankrupt company must then file a plan of reorganization with the bankruptcy court. If any of the creditors are to receive less than full value for their claims, they have the right to vote on that plan. After the vote, the court can then elect either to accept or reject the plan. In other words, the company has some leeway in designing the plan, but if it requires too steep a haircut for certain creditors, the company has little chance of getting it approved by a committee of creditors, much less the courts.

And this is why equity holders nearly always get reduced to zero. In most cases, the company will have to sell off assets to raise money to pay creditors. In almost all cases, these proceeds are going to be insufficient to pay off all prioritized creditors in full (after all, why else would the debtor have had to file in the first place?), which means that they can take either a reduced amount of money, or they can agree to take some equity in the reorganized company.

In either case, the current equity shareholders would be counting on the priority creditors' sense of charity in order to be included in the recapitalized company. I dare say that there are less sure things that one could count on, but I can't think of any offhand. There is nothing that says the creditors must include the existing shareholders -- even the insiders' stakes are reduced to zero value. That's how priority works: Those higher in the food chain eat until they are satisfied, and then each subsequent group gets its turn until either the carcass is picked dry or all of the groups have been paid to their satisfaction. It goes without saying that it's rare for creditors to leave money on the table.

Book value doesn't help
This is, of course, a highly simplified look at bankruptcy. There are some great resources out there if you'd like to learn more. But the point is: Unless you are convinced that the company can generate enough cash through the sale of its assets to meet the requirements of all its creditors, then there is no reason at all to invest. And please, for the love of God, do not use the book value number.

Book value is a useful proxy for an operating company, but it's a miserable one to approximate liquidation value, because it includes things such as goodwill and other things that cannot easily be sold, such as in-process research and development. Not only that, in a distressed sale, the purchasers are not generally all hot and bothered to overpay for assets. They buy off of liquidations to get the assets on the cheap. This, for example, is how I knew that Bear Stearns was not going to survive. When Bear began selling non-core assets to raise cash to cover its obligations, the bidding companies refused to pay more than 50 cents on the full value of the assets. But Bear was forced to sell, so the purchasers had the upper hand. (In case anyone was living under a rock at the time, Bear was acquired by JPMorgan Chase (NYSE:JPM).) The same goes for companies that are in bankruptcy protection.

Occasionally, a company emerges from bankruptcy with some pre-existing shareholders receiving something. But this is the exception, not the rule. It's sort of like betting on the slow and lame horse in a race: There is of course a chance it could win, but that's not the way to bet.

So, potential speculators, bottom dwellers, and Dumpster divers, the answer is that as a rule, investing in bankrupt companies (or even soon-to-be bankrupt companies) is a horrible idea. I'm in fact baffled that the SEC and the exchanges even allow companies in Chapter 11 to trade at all -- the implied return on the vast majority of these companies is exactly zero.

So don't do it. Please.

This is an updated version of an article first published Jan. 29, 2002.

Moral bankruptcy? Bring it on! Bill Mann owns shares in Berkshire Hathaway. Sears and Berkshire Hathaway are Motley Fool Inside Value recommendations. Berkshire Hathaway is also a Stock Advisor selection. JPMorgan is an Income Investor selection. The Motley Fool owns shares of Berkshire Hathaway. The Fool is investors writing for investors.