How long before I have to sell shares of a bankrupt company?

Q: When is the latest I can sell shares of a company after it goes bankrupt?

A: It's rarely good news for stock investors when a company says it's filing for bankruptcy protection. Investors are at risk of losing it all when this unfortunate event happens.

Investors in the common stock of a company are last in line for claims to assets in case of liquidation. All the employees, vendors and lenders are all standing in front of stock investors when it comes to parsing out value the company might have.

That's why it's prudent for investors to bail out of a stock long before it comes to bankruptcy filings. You want to sell your shares before the stock starts its downward spiral, which may include it being kicked off the stock exchange. If you can sell before things get really ugly, you can avoid some major pain. Seeing a bankruptcy filing coming isn't as difficult as it may sound.

But what if you didn't see the corporate failure coming and are left holding the shares? How long do you have before you must dump them?

There's no set deadline for this, as each case is different. Typically, long before a company filed for bankruptcy protection, the shares will be delisted to a stock trading system such as the OTC Bulletin Board or OTC Market's Pink Sheets. These are trading systems that may provide you a forum to sell your shares at a loss and claim a capital loss.

Sometimes companies that have long been dissolved can continue to trade for years. Failed savings and loan Washington Mutual (WAMUQ), for instance, was seized by bank regulators in 2008. Yet, years later, shares continue to trade on the Pink Sheets for about 5 cents a share. Investors, if they choose, can sell their shares and take the capital loss.

There are other cases when a company is gutted and all that's trading is a public shell. Regulators, including the SEC, have been more aggressive about stopping the trading in these stocks.

The bottom line is simple: Try to avoid owning stocks once things get this bad. You don't want to own a stock that's been delisted, much less pursuing bankruptcy protection. Some investors may try to speculate on these penny stocks, but since the value of the stock isn't based on the value of assets, it's really like a trip to the local gambling casino. Rather than trying to find out how long you can hold on, make it your practice to see how quickly you can get out so you're not in this situation at all.

Source: http://usatoday30.usatoday.com/money/perfi/columnist/krantz/story/2011-12-28/shares-bankrupt-company/52257956/1