Many people worry about losing property or cash when they file Chapter 7 bankruptcy or Chapter 13 bankruptcy. However, the amount of cash that is exempt in your Chapter 7 case depends on where you have lived during the past two and a half years.
How Cash Exemptions Work in Chapter 7
Exemptions allow you to keep your property and cash in a Chapter 7 bankruptcy case. The purpose of a bankruptcy filing is to give you a fresh start. 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 get rid of secured debts, like mortgages and car loans, in Chapter 7 by surrendering the property to the creditor. 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.
Exemptions Protect Equity in Property
Chapter 7 is a liquidation bankruptcy. The Chapter 7 trustee sells 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.
The majority of 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. The debtor (the person who filed for bankruptcy relief) keeps all his or her property.
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 as 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.
State and Federal Bankruptcy Exemptions
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.
Federal bankruptcy exemptions are adjusted 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. Therefore, you could potentially exempt a significant amount of cash using the federal bankruptcy exemptions.
Cash includes money in your pocket, under your mattress, buried in the back yard, in a bank account, held by a friend, in a piggy bank, or the cup holder of your car.
What are the state bankruptcy exemptions?
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.
If you live in a state for 730 days or longer before filing Chapter 7, you must follow the state laws regarding bankruptcy exemptions. However, 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 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.
What Happens If I Have Too Much Cash When I File Chapter 7?
If the total of your cash exceeds the allowed exemption amount, you might be required to surrender the amount of cash that exceeds the allowed exemption.
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.
What are my alternative options to a Chapter 7 bankruptcy?
Before filing a Chapter 7 bankruptcy case, it is crucial that you understand the bankruptcy exemptions you may use and whether any of your property may be at risk of being sold by the Chapter 7 trustee. It can also help to review the pros and cons of Chapter 7 bankruptcy.
If you are interested in Chapter 7, try 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. 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.
If you need more information or have questions about any of the above information, contact Ascend by calling or texting us at 833-272-3631.