Keeping the cash you’ve deposited in a bank account isn’t easy to do in bankruptcy. Any cash or money you have in the bank on the day you file for bankruptcy becomes property of the bankruptcy estate, and keeping it will depend primarily on your state’s exemption laws.
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 that vary greatly depending on where you live. In most cases, you’ll have to use a wildcard exemption to protect cash or bank accounts. 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 account funds, 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 prebankruptcy 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.
Learn more about protecting your bank account in bankruptcy.
Cash in a bank account is one of the first types of assets a Chapter 7 bankruptcy trustee will look for when you file for bankruptcy. Why? Most states don’t allow filers to protect much cash in a bank account—and it’s easy to find. The trustee will likely ask you for a bank statement reflecting the balance on the filing date. And, the trustee won’t be swayed by an argument that you have outstanding checks or automatic withdrawals. You’ll have to turn over any amount you can’t protect with an exemption.
In Chapter 7, the trustee will distribute nonexempt cash in a bank account—along with any sales proceeds derived from other nonexempt property—to your creditors. You’ll want to review your state’s bankruptcy exemptions carefully to make sure you can exempt all of your money before filing your case. Or, as discussed above, be sure to use bank account funds before you file on necessary items, like food, rent, and utilities. Finally, keep in mind that wages you earn after filing for Chapter 7 aren’t part of the bankruptcy estate, so they aren’t at risk of being lost.
Learn more about your property in Chapter 7 bankruptcy.
People who have a large amount of cash on hand, money in a bank account, or funds in a nonexempt investment account often don’t benefit from filing for Chapter 13 bankruptcy. Why? Because filers must pay creditors an amount equal to the value of any property they can’t protect with an exemption through the Chapter 13 repayment plan. This rule ensures that creditors get at least as much in a Chapter 13 case as they would get in a Chapter 7 case. So a debtor with $10,000 in nonexempt cash and deposit accounts would pay at least $10,000 to creditors (minus the trustee fee) in both Chapter 7 and Chapter 13.
Certain assets (such as Social Security benefits) are exempt under federal law. In most cases, 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 commingle exempt funds with nonexempt money, it will be hard, if not impossible, to protect the funds in bankruptcy. By contrast, if you have a separate account for exempt funds, showing the exempt source won’t be a problem.