When you file for bankruptcy relief, any cash or money you have in the bank (as of your filing date) becomes property of the bankruptcy estate. In Chapter 7 bankruptcy, whether you can keep this money depends on your state’s exemption laws and the source of the funds. Read on to learn more about what happens to your cash and bank accounts in bankruptcy.
For more information on how exemptions protect your property in bankruptcy, see our Bankruptcy Exemptions topic area.
In Chapter 7 bankruptcy, the bankruptcy trustee has the power to take your nonexempt cash and bank accounts and use that money to pay back your creditors. As a result, review your state’s bankruptcy exemptions carefully (or talk to a knowledgeable bankruptcy attorney) to make sure you can exempt all of your money before filing your case.
But keep in mind that wages you earn after filing for Chapter 7 are not part of the bankruptcy estate (meaning you get to keep them). Also, if you are filing for Chapter 13 bankruptcy, you can keep your nonexempt assets but you must pay your unsecured creditors the amount of their value through your repayment plan.
To learn more, see Your Property in Chapter 7 Bankruptcy.
If you have cash or money in your bank accounts, determine where that money came from. Certain assets (such as Social Security benefits) are exempt in bankruptcy under federal law. In most cases, this means that the bankruptcy trustee can’t go after that money to satisfy your creditors.
However, be aware that you must be able to trace the source of the funds to show they are exempt. If you have a separate account for exempt funds, this is typically not a problem. But if you commingle exempt funds with nonexempt money, it will become harder to protect them in bankruptcy.
If you don’t want the trustee to take your cash or money in the bank, you must be able to exempt those funds. Each state has its own set of bankruptcy exemptions. Exemption amounts can vary greatly depending on where you live. Further, even though certain states allow you a choice between state and federal bankruptcy exemptions, most states require debtors to use state exemptions.
In most cases, to protect cash or bank accounts, you will have to use a wildcard exemption. A wildcard exemption can typically be used to protect any type of personal property. Unfortunately, not many states offer a wildcard exemption. If your state does not have a wildcard exemption, look for any exemptions specifically designed to protect bank accounts or the source of the funds in the account.
If you can’t exempt all of your cash or bank accounts, you can spend the money on necessities such as food, rent, or gas before filing your case. Reorganizing your assets to take full advantage of your exemptions is commonly referred to as exemption planning. Be aware that while courts allow debtors to engage in a reasonable amount of exemption planning, excessive or systematic spending or conversion of assets can lead to allegations of bankruptcy fraud.
For more information, see Bank Accounts in Chapter 7 Bankruptcy.