Buying Stock of Companies in Bankruptcy Is a Loser’s Game
Question: I’d like your opinion on investing in companies that have filed for bankruptcy, especially those in Chapter 11. I have tried to follow some of these companies in the newspaper but have had trouble finding information. Their stocks are especially cheap, but is it realistic to expect a return at some later date?
Answer: In a word: no.
Buying the stock of companies in bankruptcy proceedings is a loser’s game. In fact, professional investors are continually amazed at how many small investors seem to be willing to lose their shirts this way.
In the vast majority of corporate bankruptcies, shareholders are left out in the cold. It’s the creditors who wind up owning the company, not the people who own its stock.
Professional and institutional investors understand this, and they are usually long gone by the time a company formally files for Chapter 11 reorganization (which often turns into a Chapter 7 liquidation). Even when a company successfully reorganizes, its liabilities are usually much larger than its assets, leaving nothing for shareholders.
Yet consistently after a bankruptcy filing, you’ll see millions of the company’s shares change hands as small investors insist, against all reason, that their stock will be worth something at day’s end.
This happens even when companies signal to investors, or tell them outright, that their shares are worthless. Such was the case with EToys, the failed Internet retailer that all but sent telegrams to investors telling them their shares were toilet paper.
Yet for weeks afterward, posters on Internet message boards insisted that they would get something for their shares, because the EToys name had some value. They were right in one sense: EToys sold its name and other assets to KB Toys Inc., but the proceeds went to EToys’ creditors and investors didn’t see a dime.
On Medicaid, Yes,
California Is Different
Q: You recently answered a question from a woman who was taking care of her elderly mother and who worried that the family home might be lost if the mom went on Medicaid. Your answers were correct if you were talking about federal Medicaid rules, but some states are more generous.
In California, for example, Medicaid is called Medi-Cal, and the period during which an asset transfer may be penalized is only 30 months, rather than the federal program’s 36 months. Also, in California a home may be transferred to anyone, not just a care-giving child, without a penalty.
A: You’re quite right: Some states diverge from the federal Medicaid rules, which is why I suggested that the original writer check with an attorney who specialized in elder-law issues before she took any action. The National Assn. of Elder Law Attorneys at www.naela.com can offer referrals.
Here’s a Tip: Don’t
Be Such a Cheapskate
Q: With so much talk about Social Security going broke, we need to make sure that contributions are made by all employees and employers.
So why are tips allowed to go unreported? I’d guess 90% of tip income is never declared, and the recipients avoid the 7.65% Social Security tax as well as income taxes. By banning tips, businesses would be forced to pay their workers a living wage and report that wage to the appropriate tax agencies.
Let’s start educating consumers about this unfair practice, which we tolerate because of social pressure. I hear waiters say, “I’ve been stiffed” so frequently that I’d like to give these freeloaders a piece of my taxpaying mind.
A: So says the man who obviously never toted a tray in his life. Listen, buddy, if you don’t want to tip your server, don’t eat out, or stick to fast-food restaurants. Tipping is customary and expected in this country, and those who stiff waiters--no matter what their rationale--are just plain cheap.
The Internal Revenue Service has cracked down on restaurants that allow their employees to hide tip income. Of course, it’s always possible to hide some cash, but the percentage of unreported tips is hardly 90%.
It might be nice if the U.S. adopted the European custom, in which the service charge is included in the meal. But we haven’t, and you’re not going to win anyone to your cause by continuing to stiff servers who depend on tip income to support themselves and their families.
If you want to increase the chances your tip will be reported, forgo cash and put your meal, and your tip, on a credit card. At least that way you’re leaving a paper trail the IRS can follow.
Where’s That Tax
Refund? Look Here
Q: Approximately two months ago I filed my federal income tax return with the expectation of obtaining a $2,850 refund, but so far I haven’t received a check. Is there a telephone number I can call to check on its status?
A: Sure. Just call the main IRS hotline at (800) 829-1040. The recorded prompts will guide you through the process. If you filed using a 1040, 1040A or 1040-EZ form, you also can check the status of your refund on the IRS’ Web site at www.irs.gov.
The IRS changed a lot of its mailing addresses this year, but many people sent their returns to the old addresses, leading to delays. Which, once again, is an argument in favor of electronic filing, because you receive IRS confirmation within 48 hours that your return has landed in the right place and been accepted.
*
Liz Pulliam Weston is a contributor to The Times. Questions can be sent to her at asklizweston @hotmail.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
