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One of the most common concerns I hear is, "Am I going to lose my cash if I file for Chapter 7 bankruptcy or Chapter 13 bankruptcy?" The answer really depends on where you've lived and which exemption rules apply to you.
Exemptions are what protect your property and cash when you file Chapter 7. Bankruptcy is designed to give you a fresh start, not to leave you with nothing. Chapter 7 cases allow you to discharge (erase) your legal obligation to repay debts.
Most unsecured debts are eligible for a bankruptcy discharge. You can also walk away from secured debts like car loans or mortgages in Chapter 7 by surrendering the property. This option can be beneficial when a person owes more on a loan than the property is worth.
However, if you lost all your property in a Chapter 7 case, it would be more challenging to recover from a financial crisis. You need some property so that you can continue to provide for your basic living needs. Exemptions are the way you protect certain assets and property in bankruptcy.
Each state has different amounts of cash that you may be able to exempt.
Exemption rules vary quite a bit by state, and they can get complicated quickly. That's why we created a free tool to help you estimate how much cash may be protected based on where you live.
Chapter 7 is technically called a "liquidation" bankruptcy. In theory, the the Chapter 7 trustee can sell non-exempt assets to pay unsecured creditors. However, some equity is protected from being used to repay creditors. If a piece of property or an asset does not have sufficient net equity to justify being sold for the bankruptcy estate, the Chapter 7 trustee abandons (does not sell) the property. When I filed Chapter 7 bankruptcy in 2022, my mom was very worried that the trustee was going to come to my house with a moving company and leave me with an air mattress and some toiletries. That did not happen.
The good news is that most Chapter 7 cases filed in the United States are "no-asset" cases. In a no-asset case, the trustee does not take any property to sell. In those cases, the person filling (also referred to as the debtor) keeps everything.
Net equity is calculated by subtracting any valid lien from the fair market value of the property. For example, if your vehicle is worth $15,000 and you owe $16,999 on the loan, your vehicle has no equity. The trustee would abandon the vehicle.
If the loan on your vehicle is $10,000, your net equity in the vehicle is $5,000. The Chapter 7 trustee could sell the car, pay the loan in full, and use the $5,000 to pay toward your debts.
However, if your allowed bankruptcy exemption is $5,000, there is no equity in the vehicle. Even if the allowed bankruptcy exemption is just $4,000, the net equity of $1,000 may not be enough for the trustee to go through the process of liquidating the vehicle if your debts are substantial.
The Bankruptcy Code includes a list of bankruptcy exemptions debtors can claim to protect the equity in property during a Chapter 7 case. The federal exemptions protect specific amounts in certain assets. The government adjusts federal bankruptcy exemptions every three years. There is not a specific cash exemption available under federal bankruptcy exemptions.
However, there is a wildcard exemption you can use to protect up to $1,325 in any property. You can also use up to $12,575 of any unused portion of a homestead exemption to protect cash in a Chapter 7 case. These amounts are in effect as of April 1, 2019. The amounts are adjusted periodically, so make sure you're looking at the most current exemption figures when reviewing your options. Therefore, you could potentially exempt a significant amount of cash using the federal bankruptcy exemptions.
"Cash" means exactly what it sounds like. Money in your bank account, physical cash, or funds sitting anywhere accessible to you (yes, money under you mattress counts.)
The Bankruptcy Code allows states to create their own rules for bankruptcy exemptions. States can enact state-specific exemptions for bankruptcy cases.
States may allow debtors to choose between state and federal bankruptcy exemptions or require debtors to use the state bankruptcy exemptions. Therefore, it depends on which state you live in whether you can use state bankruptcy exemptions or federal bankruptcy exemptions.
The exemption rules you use depend on how long you've lived in your current state. Generally, if you've lived there for at least two years before filing, you'll use that state's exemption laws. On the other hand, if you have not lived in the same state for at least two years before filing bankruptcy, you use the state laws of the state in which you resided for the greater portion of 180 days before the 730-day (two year) period.
The type and amount of exemptions under state laws vary. Some states have lower cash exemptions compared to other states. Many states have wildcard exemptions that can help you protect excess cash. It just depends on the state.
If your cash exceeds the allowed exemption amount, the trustee could require you to turn over the excess. However, if the amount of non-exempt cash is low, the Chapter 7 trustee may abandon the money if there are no other assets to sell. It depends on the amount of cash that is non-exempt and the amount you owe to unsecured debts.
Before filing Chapter 7 bankruptcy, it is important to understand exactly what may or may not be protected. It can also help to review the pros and cons of Chapter 7 bankruptcy. Take our free Chapter 7 Means Test Calculator to see if you meet the income eligibility requirements for Chapter 7.
You may also want to explore other debt-relief options if you don’t qualify for Chapter 7, or your property could be at risk in Chapter 7. Our Savvy Debt Payoff Planner can help you create an affordable plan to get rid of debt. It is a simple way to pay off debt efficiently and affordably.
Debt settlement may be another option you can use to get out of debt. In some situations, negotiating your balances down could make more sense than filing bankruptcy. Especially if most of your debt is unsecured. It really depends on what is going to save you the most money over all and get you back on your feet the fastest. Negotiating with your creditors for a lower payoff amount to forgive debt in full can save you thousands of dollars. You can negotiate with creditors on your behalf or work with a company that handles the negotiations for you.
Our Guide to Debt Settlement is an excellent resource for exploring this debt-relief option.
If you're unsure how this applies to your situation, feel free tor each out. We're more than happy to help you think it through. You can contact Ascend by calling or texting us at 833-272-3631.
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