For many people, particularly during these trying economic times, their debt has grown so much out of their control that the only way out of the financial troubles is to file for bankruptcy protection. For those filing for bankruptcy who also own stocks, it's important to know how filing will affect your equity holdings. Whether you get to keep the stocks or not depends on the type of bankruptcy protection that you seek.
Two Types of Bankruptcy Protection
Whether you get to keep your stocks depends largely upon which type of bankruptcy protection for which you file. There are two choices for consumers: You can file for Chapter 13 bankruptcy protection, in which you'll pay back your debt with an interest-free repayment plan, or Chapter 7, in which your assets are liquidized to pay off all or part of your debt.
Under Chapter 7 bankruptcy protection, a trustee will place a dollar amount on your assets and then divide the funds among your creditors. This means that you can lose your stocks -- along with other assets such as your house and cars --- to eliminate your debt. Whether this approach is taken depends upon the size of the debt. You might not need to sell off all of your assets to pay down your entire debt. In such a case, you could keep some of your assets, including your stocks.
Under Chapter 13 bankruptcy bankruptcy protection, a trustee will create an interest-free repayment plan that allows you to pay off your creditors at a rate you can afford. Under this type of bankruptcy, you might be able to keep such assets as your home, cars and stocks. It depends upon whether you have enough funds to remain current on your repayment plan. You may have to sell off some of your assets, including your stocks, if you can no longer afford your repayment plan payments.
Declaring bankruptcy is a complex decision. You can eliminate your debt, but you could lose many of your assets, including any stocks that you own. You'll also take a hit to your credit score. A Chapter 7 bankruptcy filing remains on your credit report for 10 years. Chapter 13 bankruptcy remains on your report for seven.