Can I Keep Cash in Chapter 7 Bankruptcy?

Most people can keep some cash when filing for Chapter 7, although most states don't allow filers to protect much. However, there is more than one way to avoid losing money in Chapter 7. Learn how to use a wildcard and other bankruptcy exemptions to protect your money and assets in a Chapter 7 bankruptcy and strategies to consider when a bankruptcy exemption isn't available.

Filing for Chapter 7 Bankruptcy: The Process

Most people know it's possible to lose property in Chapter 7, and many wonder why they can keep anything at all. The short answer is that the purpose of Chapter 7 is to give you a fresh start, not leave you destitute. If an item of property, an investment, or cash is "exempt" or protected under the bankruptcy exemption laws, you can keep it.

You agree to relinquish nonexempt property, things typically considered unnecessary luxury items, to the Chapter 7 bankruptcy trustee appointed to your case. The trustee liquidates the property and distributes the funds to unsecured creditors. In exchange, you receive a bankruptcy discharge, the order that wipes out qualifying debt.

Learn more about your state's exemptions and what to expect when filing for Chapter 7 bankruptcy.

How Much Cash Can You Keep When Filing Chapter 7?

In most states, not much. Most filers can retain homes and cars with a reasonable amount of equity, a retirement account, furnishings, clothing, some work tools, and medical devices. Ultimately, your state decides the amount of funds and property you can keep or exempt. Also, your state might let you choose to use the federal bankruptcy exemptions instead.

Using a Cash Exemption in Chapter 7

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), although most have limitations, so check that it covers money. Sometimes it's excluded.

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 can protect $13,000 using the wildcard exemption and will turn over the remaining $1,000. If you filed for Chapter 13, you would include the $1,000 in your Chapter 13 plan payments.

The Source Also Determines How Much Cash Is Exempt in Bankruptcy

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 state's homestead exemptions allow you to protect home sale proceeds for a particular period.

Keep in mind that exempt money from any source can lose protective status when comingled with nonexempt funds. The simplest way to ensure you can exempt particular proceeds is by holding them in a separate bank account. This strategy will allow you to trace the funds to the exempt source and prove that the money qualifies for exemption protection.

Cash You Can't Keep in Bankruptcy

If you sell exempt property before filing for Chapter 7 bankruptcy, the cash proceeds usually lose the exemption protection unless a statute explicitly protects the funds for a period. For instance, if you're entitled to a $2,500 motor vehicle exemption and sell your car before filing for bankruptcy, the sale proceeds won't be exempt under the motor vehicle exemption.

How to Protect Cash Before Filing for Bankruptcy

Most people with a significant amount of cash that they can't protect with an exemption delay filing for bankruptcy until they use the money for their personal benefit. The key is ensuring you use it properly. For instance, you always have the right to use your money and property to pay bills.

To prevent a problem after filing, use the funds for necessary things, like rent, utility payments, and needed clothing. Also, pay what's currently owed (for instance, don't pay rent for months in advance because the trustee will likely be able to recover the preferential payments), and keep receipts.

You might be able to invest the money into exempt property. However, some courts frown on the practice, so consult a bankruptcy lawyer before proceeding.

Hiding Cash in Chapter 7 or Chapter 13 Bankruptcy

Filers must report all assets when filing for bankruptcy, including cash, and intentionally hiding property is considered bankruptcy fraud. The Federal Bureau of Investigation (FBI) investigates bankruptcy fraud, and the consequences of committing bankruptcy fraud are severe. If convicted, sentencing can include up to twenty years in federal prison and a $250,000 fine.

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? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. Also, don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.