The Answer Guy
Q: Shares in Northwest Airlines, now less than $1, are looking cheap. Could that stock have any value after Northwest emerges from bankruptcy?
(MONEY Magazine) - Q Shares in Northwest Airlines, now less than $1, are looking cheap. Could that stock have any value after Northwest emerges from bankruptcy? --Todd Olness, Shakopee, Minn.
ANSWER Purchasing a bankrupt company's stock so you can profit when the business exits Chapter 11 is like playing the lottery. In either case you could snag a treasure for mere pennies, but your odds of success are ridiculously low. When a company emerges from bankruptcy, its shares are canceled and worthless. The reorganized company's stock belongs to bondholders and other creditors. Original shareholders get no stake in the reorganized company unless it can first pay off its debts. And, of course, if a company could pay off its debts, it wouldn't have filed for bankruptcy protection in the first place.
Original shareholders have emerged with a profit only a handful of times over the past 20 years, says bankruptcy newsletter publisher Peter A. Chapman. The chances that an airline would be next are slim, given the industry's talent for burning shareholders. Northwest is losing money, and its liabilities outweigh its assets by more than $4 billion. "Once a company is in bankruptcy and liabilities exceed assets," says Chapman, "if you're a shareholder, you're just fantasizing."
Q My grandmother gave me stock she bought years ago. Can I sell these appreciated shares, now worth $30,000, to help fund college for my kids (ages three and seven), and avoid paying capital-gains tax? --Mark Nosek, Roscoe, Ill.
ANSWER Probably not.
If your kids were 14 or older, you could give them the stock and they would most likely pay a 5% tax on any sale, rather than the 15% you would pay. But since they're younger than that, they'd be subject to the "kiddie tax" on unearned income and would end up essentially paying your rate.
Of course, they could capture the lower rate by waiting until age 14 to sell the shares. But delaying a sale for seven years to save on taxes really isn't a great idea, says Gary S. Williams, a financial planner in Columbia, Md. You don't want a big chunk of college savings tied up in a few stocks that could collapse, so Williams advises that you sell, take the tax hit and then reinvest the money in one of the diversified funds available in the Illinois 529 college savings plan. Couples can even claim a state income tax deduction for up to $20,000 in contributions, which could lessen the sting of your capital-gains pain.
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