What Happens to Stockholders During a Chapter 13 Bankruptcy?

When a debtor who owns stock files for Chapter 13 bankruptcy, he generally will be allowed to keep many of his assets, including stocks and bonds. This is because Chapter 13 bankruptcy does not typically require liquidation of the individual's assets, unlike a Chapter 7 bankruptcy, which is a liquidation procedure. In some cases, however, the debtor stockholder may be required to sell off some or all of his securities.

To declare bankruptcy and have a judge approve the filing, a person's debts must exceed his assets. If the debtor owns stock, he will be required to disclose his financial portfolio to the court. If the value of the stock is too great, his Chapter 13 bankruptcy filing may be rejected, as stocks are considered liquid assets.

If the debtor's Chapter 13 bankruptcy filing is accepted by the court, then he won’t usually be forced to liquidate his stocks or other assets to pay off outstanding debts – at least not immediately. He will be required to reorganize his finances in such a way that he is able to pay his financial obligations, as determined by the judge.

While a debtor enjoys greater protections under a Chapter 13 bankruptcy than he would under the more onerous Chapter 7 liquidation proceeding, he will also be required to pay back more debts. The debts that he must repay will be determined by the judge. If the debtor fails to repay the debts in the manner ordered by the court, then he may lose some of his protections. In this scenario, the debtor-stockholder may choose to sell some of his stocks to raise funds needed to meet court-ordered payments.

The rules that apply to the protections extended to individuals in bankruptcy are established at the state level. This means that the ability of a debtor to maintain ownership of stock or other assets may be affected by rules in the state where the bankruptcy was filed. To determine the applicable rules, an attorney with experience in bankruptcy law should be consulted.