Can I Keep Cash in Chapter 7 Bankruptcy?

Most people can keep some cash when filing for Chapter 7. However, because most states don't allow filers to protect much, it's understandable why you might worry about losing money in Chapter 7. What you can do to protect your money depends on a multitude of factors, including state and federal exemption laws.

This article explains how to protect your money and assets in a Chapter 7 bankruptcy, and strategies to consider when a bankruptcy exemption isn't available.

Chapter 7 Bankruptcy: The Basics

Chapter 7 Bankruptcy provides a "fresh start" by discharging (eliminating) qualifying debts. However, there's also a risk of losing property in Chapter 7, which is why it's essential to learn which of your assets you can keep because they're "exempt" (protected) and which you stand to lose because they're "nonexempt" (not protected).

Here's where you should start:

• Exempt Property. If an item of property, an investment, or cash is protected under bankruptcy exemption laws, you can keep it. The purpose of Chapter 7 is to provide relief, not to leave you destitute.

• Nonexempt Property. Any property deemed nonexempt—typically unnecessary luxury items—you must relinquish to a Chapter 7 bankruptcy trustee. The trustee liquidates (sells) the property and distributes the funds to your unsecured creditors (those creditors whose debts aren't backed by collateral). In exchange, you receive a bankruptcy discharge, which legally wipes out your qualifying debt.

To understand more about this process, consider learning about the steps involved in filing for Chapter 7 bankruptcy.

How Much Cash Can You Keep When Filing Chapter 7?

The amount of cash you can keep in Chapter 7 bankruptcy varies significantly by state. Most states allow filers to retain essential assets like homes and cars with a reasonable amount of equity, a retirement account, furnishings, clothing, some work tools, and medical devices. However, cash exemptions are often limited.

Your state determines the amount of funds and property you can keep. Some states allow you to choose between your state's bankruptcy exemptions and the federal bankruptcy exemptions. However, some states opt out of the federal system, meaning you can only use your state's exemptions. You'll want to be sure you select the proper exemption set.

Using Cash Exemptions in Chapter 7 and Chapter 13

Some state exemptions specifically cover an amount of cash, although they're often minimal. For instance, $300 is common. Other states have wildcard exemptions or general property exemptions that you can use to protect any property up to a specific dollar limit, including cash. Some wildcard exemptions are very generous (as is the federal wildcard exemption). However, most have limitations, so ensure it covers the money. Sometimes it's excluded.

Example. Suppose your state offers a $1,000 wildcard exemption, and you have $1,500 in cash that isn't covered by any other specific exemption (like wages or public assistance). You could use the $1,000 wildcard exemption to protect $1,000 of that cash, leaving $500 as nonexempt, which would likely be turned over to the trustee."

Exemptions for Specific Cash Sources

In many cases, your ability to protect cash will depend on why you have the money. For instance, here are some examples of cash received from particular sources that could have additional bankruptcy exemption protection if documented properly:

• wages
• unemployment benefits
• public assistance
• Social Security proceeds, and
• personal injury proceeds.

Also, some states' homestead exemptions allow you to protect home sale proceeds for a specific period.

When You Can't Exempt Cash in Chapters 7 and 13

If your cash isn't exempt, Chapter 7 typically involves the trustee seizing it and distributing the funds to creditors. Filing for Chapter 13 bankruptcy generally doesn't offer more protection for nonexempt cash. In Chapter 13, you would still be able to protect the same amount of money with available exemptions, nothing more, nothing less. The nonexempt cash would be factored into your repayment plan, increasing the amount you pay back to creditors over three to five years.

Example. Suppose your state doesn't exempt cash but has a liberal $13,000 wildcard exemption you can use to protect money, and you have $14,000 in cash when you file for Chapter 7. You would be able to protect $13,000 using the wildcard exemption and would turn over the remaining $1,000 to the trustee. If you filed for Chapter 13, you would include the $1,000 in your Chapter 13 plan payments.

Avoid These Problems in Chapter 7 Bankruptcy

No one enjoys unhappy surprises—especially not those that result in losing money.

Commingling Funds Destroys Cash Exemption Protections

If you remember nothing else from this article, remember this: Exempt money loses its protected status when mixed or commingled with nonexempt funds. If your goal is to preserve exempt funds from creditors—whether in or out of bankruptcy—you should maintain exempt funds in an exclusive account.

If exempt money is mixed with nonexempt funds in the same account, tracing the exempt portion becomes challenging, if not impossible. This situation is what leads to the entire amount being considered nonexempt and subject to seizure by the trustee.

Example. Suppose you received $2,000 in unemployment benefits into your bank account through direct deposit. To use an exemption to protect the unemployment benefits in Chapter 7, you'd need to prove the funds were indeed exempt unemployment benefits. Demonstrating that the unemployment department directly deposited funds into the account would be a good start. However, if you mixed the funds with other deposits, the unemployment funds would lose their exempt status. It would be impossible to prove that the cash was unemployment funds and not from a different deposit. Keeping exempt funds in a separate account is the simplest way to ensure traceability and protection.

Converting Exempt Property to Nonexempt Cash Before Bankruptcy

If you sell exempt property before filing for Chapter 7 bankruptcy, the cash proceeds usually lose their exemption protection unless a statute explicitly protects those funds for a particular period. For instance, if you have a $2,500 motor vehicle exemption but you sell your car before filing, you won't be able to use the motor vehicle exemption to protect the cash sale proceeds.

That's not to say it's impossible to protect sales proceeds in every case. Some states allow you to use a homestead exemption to safeguard home sales proceeds for a defined period. Still, not all do, and that type of protection is rarely extended to other exemptions. In most cases, once you convert property to cash, you need a specific cash or wildcard exemption to protect it.

Example. Suppose you have money deducted from your check each month and deposited into an ERISA-qualified retirement account that is fully exempt in Chapter 7. However, before filing for bankruptcy, you withdraw $25,000 and place it into your checking account. Once withdrawn, the funds would lose the retirement fund protection, and you would need to protect the money another way if you were to file for bankruptcy. If an exemption protecting cash or a wildcard exemption was available to cover the funds, you could keep it. Given the amount, keeping it would be difficult in most states (California would likely be your best bet if you didn't have much else to protect).

Learn more about protecting retirement funds in bankruptcy and why most attorneys don't recommend withdrawing funds from a retirement account to pay off debt.

Cash You Can't Keep in Bankruptcy

The title of this section is slightly misleading because there really isn't any particular type of cash that you can't keep in bankruptcy. If an exemption protects it, it's yours. If one isn't available, you'll lose the money in bankruptcy.

It doesn't matter whether the funds are in your wallet, a bank account, an investment fund, or have yet to be received by you. You must be able to protect it with an exemption to keep it. Other than helping to determine whether a particular exemption will protect the funds, how the money is labeled is of little consequence.

These rules apply to all of the following types of cash that fall within this rule, although you should know about some of the more restrictive cash rules in Chapter 7 bankruptcy:

• Wages. If you're at the end of the pay cycle but haven't yet been paid, assume you must protect the wages you've earned but haven't yet received with an exemption. Some trustees pursue these funds more aggressively than others.
• Inherited cash and lottery winnings. Not only must you exempt these funds if you're entitled to them before you file (even if you haven't yet received the money), but you must report them if you become entitled to them during the 180 days after filing.
• Gifted cash. Like all other forms of money, you must exempt it to keep it.
• Tax refunds. Timing can come into play with tax refunds, but generally, if you're entitled to a tax refund that you haven't yet received, you must exempt it. Learn more about keeping tax refunds in Chapter 7.
• Settlement funds. Many states have exemptions that protect some lawsuit proceeds. As with all funds, the proceeds would need to be in a separate account to avoid the commingling problem.
• Business income. Cash generated from a business could be considered personal property that you must protect with an exemption.

Most people with large amounts of cash to protect aren't truly bankrupt. A bankruptcy lawyer can review your specific circumstances and explain the extent to which exemptions can protect your funds.

How to Protect Nonexempt Cash Before Filing for Bankruptcy

Many people with a significant amount of cash that they can't protect with an exemption choose to delay filing bankruptcy until they've used the money for their personal benefit. To prevent running afoul of the trustee, you'll want to use these funds appropriately.

The key to remember is this: You always have the right to use your money and property to pay bills. Therefore, to avoid problems after filing, you'll want to use funds for necessary expenses, such as:

• rent
• utility payments
• needed clothing
• healthcare, prescriptions, or urgent procedures
• car repairs required to maintain a work vehicle
• food and groceries (avoiding excessive or luxury items)
• Basic household supplies (e.g., cleaning supplies, toiletries)

You'll want to keep detailed receipts and, in all instances, pay only what you currently owe. Don't prepay months of rent or other expenses in advance because the trustee will likely recover them as preferential payments. (Preferential payments occur when you favor one creditor over another.)

Expenditures to Avoid Before Chapter 7 Bankruptcy

Also, there are certain expenditures that you'll want to avoid shortly before bankruptcy. For instance, the following items are generally not considered necessary, and making them can raise red flags about whether you're truly bankrupt or trying to get over on creditors:

• Luxury goods. These items would include nonessential high-value items like designer clothes and expensive electronics.
• Vacations and nonessential travel. Most individuals who file for bankruptcy aren't vacationing and enjoying trips shortly before filing.
• Large gifts or donations. Transfers of significant cash or assets to others without a direct, immediate, and necessary personal benefit.

You might also consider investing nonexempt cash into exempt property. However, some courts frown on this practice if it appears to be done solely to shield assets from creditors. Consult a bankruptcy lawyer before proceeding with such a strategy.

Hiding Cash in Chapter 7 or Chapter 13 Bankruptcy

One of the most important things to understand is that when filing for bankruptcy, you must report all assets, including cash. Intentionally hiding property is considered bankruptcy fraud, a serious federal crime.

The consequences of committing bankruptcy fraud are severe. Not only is bankruptcy fraud investigated by the Federal Bureau of Investigation (FBI), but if criminally convicted, sentencing can include up to twenty years in federal prison and a $250,000 fine.

Example. Suppose you give $4,000 in cash to your sister to hold for you shortly before filing for bankruptcy. This action would amount to a fraudulent transfer because giving it to her was an attempt to hide it from creditors. Not only would the trustee demand its return, but you could be denied a bankruptcy discharge.

Common Misunderstandings About Cash in Chapter 7 Bankruptcy

Below, we clarify a few points about money in Chapter 7 that many find somewhat confusing.

Myth. "I can just spend all my cash on anything I want before filing, as long as I don't have it when I file."

Reality. While using cash for necessary expenses is permissible and encouraged, excessive or nonessential spending shortly before filing can be scrutinized by the bankruptcy trustee. The potential problem with depleting assets that would otherwise be available to creditors is that it demonstrates an intent to purposefully avoid paying creditors, which in many circumstances, would be considered fraudulent.

Myth. "I can protect my cash by giving it to a friend or family member before filing."

Reality. Attempts to hide property from creditors are forms of fraudulent transfers or preferential payments, and the trustee will look for both. If found, the trustee will "claw back" the funds by demanding the recipient return the money. The consequences of these actions can include denial of your discharge or even criminal prosecution.

Myth. "The bankruptcy trustee won't check how I spent my cash before filing."

Reality. Bankruptcy trustees review all aspects of a debtor's financial history, including bank statements and transactions up to ten years before the filing, depending on the transaction type. If found, you should expect the trustee to investigate significant cash expenditures and transfers.

Myth. "All cash is treated the same in bankruptcy."

Reality. The more accurate statement would be that keeping cash requires that an exemption protect it. Whether your money is protected will often depend on whether the funds are commingled with funds from multiple sources in a banking or investment account. If not, and you can identify that the particular funds fall into a category such as wages, public assistance, or personal injury settlements, and a state or federal exemption available to you protects those funds, then you can keep them. The unfortunate reality is that few people take the essential step of keeping the exempt funds separate from nonexempt funds.

Steps to Protect Cash Before Filing for Chapter 7

If you'd like a shortcut incorporating the information within this article, here's a strategy to consider:

1. Review cash on hand and bank accounts. Compare the funds to the state or federal exemptions available to you and determine the amounts that are exempt and nonexempt.
2. Keep exempt funds in a separate account. Maintain funds with a specific exempt status, such as Social Security funds, in a separate bank account. Don't mix exempt funds with nonexempt funds.
3. Spend nonexempt funds before filing. Consider delaying your bankruptcy filing until you can use nonexempt funds for essential living expenses, such as rent, food, utility bills, clothing, medical expenses, and car repairs.
4. Proceed with caution. Avoid the appearance of fraudulent transactions by not purchasing luxury items or vacations, giving large gifts to friends or family, or prepaying future expenses. Document your expenditures and keep receipts in case the trustee questions purchases after reviewing your finances.
5. Consult a lawyer. Before spending large amounts of money or converting nonexempt assets to exempt assets, talk with a bankruptcy attorney familiar with the practices in your area. A legal professional can help you achieve your goals while avoiding potential pitfalls, so you don't lose assets unexpectedly or face more severe consequences.

Following these steps should increase the likelihood of your bankruptcy case proceeding smoothly and without issues.

Should You Consult an Attorney?

It's essential to understand what will happen to your property in bankruptcy. In many cases, if you make an exemption mistake in your Chapter 7 matter, you won't be able to dismiss your bankruptcy case. The court will move forward and distribute your nonexempt assets to your creditors, even if you lose something you thought you could keep.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? We wholeheartedly encourage research and learning, and you can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. These resources can explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Additionally, information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.