Scrap Paper

Scrap paper is a stock certificate that has become worthless because a company is bankrupt or out of business. A physical stock certificate owned by an unhappy shareholder (or more precisely, a former shareholder) is merely a piece of paper representing ownership of nothing. The certificate may not literally be worth zero if it is considered - or could be considered one day in the future - a collectible that can adorn a wall. Maybe a Lehman Brothers stock certificate has some value to somebody.

A shining stock certificate that gives a proud investor claim on the assets of a firm can lose luster and eventually turn into scrap paper if the firm fails. This failure could take the form of bankruptcy, if the firm had debt and other liabilities that exceeded the value of assets, leaving no equity value; or the failure could be an outright wind-down or cessation of operations, regardless of whether any debt existed.

When a company files for Chapter 11 it seeks temporary protection from creditors so that it can reorganize its imperiled business and hopefully return to health. In bankruptcy proceedings, a company negotiates with creditors, whose claims must first be paid before shareholders. In almost all cases, existing shareholders get wiped out, leaving them clutching scrap paper that used to be stock certificates. In rare cases, a company may have some assets left over after paying all creditor claims, in which case shareholders would retain some value in the paper, and if the company can stage a recovery, the much-diminished value of the stock certificates could grow anew. Another way stock certificates could avoid a scrap fate is if creditors agree to swap debt for equity. However, this would result in the transfer of equity ownership from existing shareholders to the creditors. Existing shareholders end up with scrap paper and the creditors receive new stock certificates in the company after it emerges from bankruptcy.