Can I Keep Cash in Chapter 7 Bankruptcy?

You don't have to give up everything when you file for bankruptcy. You can keep any property that qualifies as an exempt asset—including cash. The tricky part is that most state exemptions don't allow you to protect much cash; however, you might be able to use a wildcard exemption to cover a more significant amount. Read on to learn how bankruptcy exemptions can protect your cash and other property in a Chapter 7 bankruptcy.

Using Bankruptcy Exemptions to Protect Cash

When you file for Chapter 7 bankruptcy, you agree that in exchange for a bankruptcy discharge, the bankruptcy trustee appointed to administer your matter can take property to pay back unsecured creditors. But, if an item of property or an amount of money is exempt under the bankruptcy exemption laws, you can keep it.

The exemptions available to you will depend on the law in your state. Some state exemptions specifically cover an amount of cash (although they're often minimal, for instance, $300). Other states have wildcard exemptions or general personal property exemptions that allow you to protect any type of property up to a certain dollar limit, including cash.

Example. Suppose that your state doesn't exempt cash, but has a $3,000 wildcard exemption. You have $4,000 in cash. You can protect $3,000 using the wildcard exemption but will probably have to turn over the remaining $1,000.

Cash That Might Be Exempt

Here are some examples of cash (or assets readily converted to cash) that could have additional bankruptcy exemption protection:

• IRs or other exempt retirement accounts or benefits
• wages
• unemployment benefits
• public assistance
• cash or bank balances
• Social Security proceeds (as long as they're held in a separate bank account—these funds lose their protection when comingled with money from other sources), and
• personal injury proceeds.

Cash That Won't Be Exempt

As a general rule, if you sell exempt property before you file for bankruptcy, the cash proceeds usually lose the exemption protection. For instance, if you're entitled to a $2,500 motor vehicle exemption, and you sell your car before filing for bankruptcy, the sale proceeds cannot be claimed as exempt under the motor vehicle exemption.

But this isn't always the case. For instance, some state's homestead exemptions allow you to protect home sale proceeds for a particular period. Also, Social Security proceeds retain their exempt status as long as they can be traced back to their source (for instance, if you deposit the Social Security funds in an exclusive-use bank account).

Consult With an Attorney

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

Be sure that you understand what will happen to your property before you file. Either consult with a self-help book like How to File for Chapter 7 Bankruptcy by Attorney Cara O'Neill and Albin Renauer, J.D., or consult with a local bankruptcy lawyer.