What Happens to My Stocks if I File Bankruptcy in California?

What Happens to My Stocks if I File Bankruptcy in California?

Generally, stocks don’t get any special treatment in a California bankruptcy. In other words, most stocks are treated like any other asset. What that means for the bankruptcy filer depends on which type of bankruptcy you file, and perhaps on which California bankruptcy exemptions you choose. 

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Table of Contents
  1. California Bankruptcy Exemptions and Stock Ownership
  2. What Happens to Stocks in Chapter 7?
  3. What Happens to Stocks in Chapter 13? 
  4. ERISA-Protected Employee Stocks
  5. Next Steps for Stock Owners Considering Bankruptcy

California Bankruptcy Exemptions and Stock Ownership

California bankruptcy petitioners don’t have the option of choosing federal exemptions as bankruptcy filers in some states do. But, California is unique in offering two sets of bankruptcy exemptions, known as 703 exemptions and 704 exemptions. The person or married couple filing bankruptcy may select which exemptions best suit their situation. 

One set of exemptions is geared primarily toward protecting the debtor’s home, with some additional exemptions for personal property. The other includes a longer list of types of property that may be protected.

Neither specifically lists stocks. However, the set geared toward protecting more personal property includes a “wildcard” exemption. The wildcard exemption may be applied to any property the debtor wishes to protect. 

Erik Clark

An expert tip from Erik

As of April 1, 2022, the wildcard exemption is $1,700. Standing alone, that obviously won’t go far to protect your investments. However, the statute also provides that any unused portion of the homestead exemption may be added to the wildcard exemption.

So, for a debtor who does not own a home, has no equity in the home they are purchasing, or has a very small amount of equity, the wildcard exemption may be larger–up to $33,650. 

What Happens to Stocks in Chapter 7?

In a Chapter 7 bankruptcy case, any stocks that can’t be protected with a bankruptcy exemption can be liquidated by the bankruptcy trustee for the benefit of creditors. Whether that means all of your stock, some portion of your stock, or none of your stock depends on the value of the stock you hold, which set of exemptions you choose, and what other property you have to protect. 

What Happens to Stocks in Chapter 13? 

In a Chapter 13 bankruptcy case, you have some control over what happens to your stock. In Chapter 13, you don’t necessarily have to surrender non-exempt property. So, if you have stock not covered by exemptions and you want to keep it, you can–as long as your bankruptcy plan payments are at least equal to the total non-exempt property you’re keeping.

ERISA-Protected Employee Stocks

Employee stock ownership plans (ESOPs) may be treated differently from other stocks. That’s because some ESOP plans are protected under the federal Employee Retirement Insurance Security Act of 1974 (ERISA). But, not every employee stock ownership plan falls under ERISA protections. That is partially determined by the terms of the plan. 

One set of California exemptions also protects certain payouts due under an employee stock ownership plan. However, those payments are protected only to the extent that they are necessary for the support of the debtor and their dependents.

Your bankruptcy attorney can explain the factors that determine whether an employee stock plan is protected in a California bankruptcy and help determine whether and to what extent your stock and related payouts may be exempt.

Next Steps for Stock Owners Considering Bankruptcy

First, what not to do: transferring stock to a friend or family member so you won’t be holding it as an asset when you file for bankruptcy is a fraudulent transfer. The bankruptcy trustee can “unwind” fraudulent transfers, which means taking back the property from the person you transferred it to, and the worst thing is you then cannot protect ANY of the stock. Selling the stock in advance of bankruptcy typically won’t help, either, since the money you receive from the sale will also be an asset that may be available to the bankruptcy trustee.

In addition, you may take steps like the ones above only to find out after the fact that there was a better way. Your best option is generally to speak with an experienced Los Angeles bankruptcy attorney before you make any decisions about how to move forward. 

A seasoned bankruptcy attorney can help you determine the best course of action by:

  • Explaining your options for exempting stock and the extent to which exemptions are available
  • Assist you in determining the “true value” of your stock
  • Factoring in your other property and your priorities to determine whether using your wildcard exemption to protect stock is the right choice for you
  • Weighing the pros and cons of both Chapter 7 and Chapter 13 bankruptcy with you so you can determine which type of bankruptcy best serves your needs
  • Helping determine whether it is feasible to keep your non-exempt stock in Chapter 13, and whether making higher plan payments to retain the stock is the right choice for you
  • Discussing your options for legally converting non-exempt stocks to exempt assets before filing bankruptcy

The bankruptcy attorneys at Borowitz & Clark have decades of experience in debt resolution, including bankruptcy cases involving complex issues. If you own a significant amount of stock and are considering bankruptcy, we can help you determine the best way forward for you. Just call 877-439-9717, fill out the contact form on this site, or click in the lower right-hand corner of the page to chat right now.

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