Source: GT Advanced Technologies

Bankruptcy. Companies that are not profitable and can no longer continue its business or those taking on too much debt tend to declare bankruptcy. In such an event, it either files for Chapter 11 or Chapter 7.

The process. A bankruptcy judge will appoint a committee of creditors and bondholders to determine the best course of actions. After determining the right chapter to file and laid out their comeback plans, they have to get the approval of a bankruptcy judge. That said, let's examine what Chapter 11 and Chapter 7 entails.

Chapter 11. The company reorganized its business, for instance to sell unprofitable divisions, so that it can become profitable again. The perk of filing for Chapter 11 is that creditors can no longer go after the company. Meanwhile, the company is not closing down the shop: Business will be ongoing as usual. The catch is that a bankruptcy judge has to approve all major business decisions, which can limit the freedom for a company. Nonetheless, that might be what's needed to keep the management disciplined.

Chapter 7. If it is unlikely that the company will become profitable in the future, Chapter 7 might be the proper decision. In such an event, a company sells all of its assets—buildings, equipment, warehouse and etcetera—to get as much money as it could to repay any loans.

Trading and New Stocks. Bankruptcy filing does not stop the stocks from being traded. Usually, when a company went bankrupt, its stock is removed from the main market (NASDAQ, NYSE); however, its stocks continue to trade. Now, the next part is quite tricky. The company can then decide to either list the new shares right away or not.

If it does, the new stock symbol will be same as the old one, but with the letter Q at then end; and it will trade in the OTCBB market (i.e. the "Pink Sheet"). For example, GT Advanced Technology (NASDAQ: GTAT) changed to (OTCBB: GTATQ).

For companies not issuing new stocks right away, the letter V will be added at the end of the usual tickers when they decided to list their stocks. 

Emerged from Bankruptcy. As mentioned, a company that filed Chapter 11 to keep the banks (or creditors away) bought more time for the management to turn the business around. Despite rarely successful, there are companies like General Electric and American Airlines that filed for Chapter 11—got the break from banks that they needed—and became highly profitable business again.

Often times, companies coming out of bankruptcy wanted to put their past behind so they take on a new name and start all over. Usec, Inc., for example changed its name to Centrus Energy (NYSE: USU). As of now, their stocks are worthless; notwithstanding, they still conduct their business and are now looking for a new CEO.

Similar to Mike Tyson—who got a second chance in life, made the most of it and became household names—a company that successfully turned around tends to be your multibaggers investment. And just as there isn't many Boxer like Tyson out there, the risk of a bankrupt stock is quite high: Chances of failures are overwhelming.

Bottom Line. If you hold stocks like GTAT that recently went bankrupt, it is crucial that perform your due diligence. GT Advanced Technology and Pinnacle airlines are my two investments that went bust. Don't feel bad as no one gets it right all the times. But it's critical that you figure what to do with your stocks at this point.

First, figure out under what bankruptcy code the committee filed. If it was chapter 11, there is still hope your investment will one day will come back. If Chapter 7 is the case, it's game over.

But you can save yourself from further loss, or in rare instance gain from the proceeding, by careful appraisal of how much the assets are actually worth. If there are excess equity and cash left after the creditors got their share, you might be able to profit from the bet. Nonetheless, reality remains that there is nothing left for common shareholders most of the times.

It is important to note that companies tend to overestimate the asset's worth in their bankruptcy filing. If you're an expert in bankruptcy cases, it's best to take a pass. One thing though, GTAT seems to have an excess of equity over its liability. That's a good start for those who like challenges to conduct further research.

"Integrity, ingenuity, essence and essentially all else follows."