The term "equity claim" pops up most often when a publicly traded company files for Chapter 7 bankruptcy liquidation. The claim is a kind of ticket that entitles a shareholder or investor to a portion of the company's remaining assets. This claim may be the only way for a shareholder or investor to recoup capital and avoid losing money from the original investment.
Equity Claim Definition
An equity or residual claim is the sum of claimable company earnings after all repaying all the business' debts according to the Free Dictionary's website. Any party entitled to a share of a company's earnings, including stock shareholders, has an equity claim on the company's remaining profits. The total size of the each equity claim depends greatly on how much company stock each stockholder possesses or the amount of capital the investor lent to the business.
Bankruptcy and Creditors
The question of equity can arise when a publicly traded company files for bankruptcy liquidation. A creditor does not have an equity claim to a company's residual profits or liquid worth because the creditor gets paid from the top of the money pile in ascending order based on the amount of risk a creditor took in offering the company an infusion of capital. A secured creditor takes the least risk and receives financial compensation first while an unsecured creditor takes the most risk and receives payment last.
Shareholders in Bankruptcy
A shareholder wishing to place an equity claim on any remaining portion of a company's liquidated assets must file paperwork with the bankruptcy court declaring that intent. This places the shareholder in a kind of a investment waiting line where the trustee in charge of the case attempts to divide a company's remaining assets to pay each shareholder as much as possible to give them the best chance of recouping initial investment amounts. A shareholder is not usually liable for the debts of a publicly traded company in bankruptcy as long as the shareholder plays an active role in company decisions and debt acquisition.
Equity Claim Denial
Just because a shareholder or investor has an equity claim against a company, doesn't mean the court has enough remaining assets to satisfy the claim. In bankruptcy, a shareholder is the most vulnerable to losing money through the liquidation process because a shareholder takes the most risk in choosing to invest with a publicly traded company. The trustee may simply have no funds remaining after paying the corporation's debts to satisfy or even partially pay the shareholder's equity claim. This could cause a shareholder to sustain a large financial loss.
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