Worrying about losing cash in bankruptcy may make you hesitate to file. It's a common misconception that filing for Chapter 7 relief automatically means giving up everything. For example, check my personal bankruptcy experience article series to understand how cash was treated.
Thankfully, there are often federal and state bankruptcy exemptions that can help protect your assets, which we will cover below.
Also, in 2024, I put together this free Should I File Bankruptcy quiz that can answer such questions by providing estimates such as qualification, costs, pros and cons, and alternatives.
Understanding the Chapter 7 Cash Exemption Process
Chapter 7 bankruptcy is a way to eliminate your unsecured debts and give you a fresh financial start. When you file for a Chapter 7 bankruptcy, you can keep certain assets protected by exemptions.
Exemptions vary by state and are designed to help you retain a minimum amount of property and cash. For example, you can keep your home, car, personal property, and a certain amount of money.
It is important to note that exemptions only apply to assets you own when you file for bankruptcy. You cannot exempt assets that you acquire after filing for bankruptcy. Some investments, such as a second home, retirement accounts, or luxury items, may not be protected by exemptions.
It Depends on Where You Live
Understanding the exemptions available in your state is vital as this can significantly impact the outcome of your bankruptcy case. With the help of state bankruptcy exemptions, you can protect a portion of your assets and property, ensuring you have the means to maintain your basic living needs after filing for bankruptcy.
Use the cash and bankruptcy exemptions below to estimate how much you can keep in your state.
The rules surrounding exemption can be complex, so it's essential to seek professional guidance. This way, you will understand what to expect and make informed decisions about your bankruptcy case.
Equity in Assets and Property Protected by Exemptions
The primary goal of a Chapter 7 bankruptcy is to liquidate assets to pay off creditors. However, certain exemptions protect certain assets and property from being sold by the Chapter 7 custodian.
When a property does not have enough value to justify its sale, the Chapter 7 custodian may abandon the item, allowing the debtors to keep it. Many Chapter 7 cases filed in the US result in a no-asset outcome.
In the cases of the no-asset outcome, the Chapter 7 custodian does not seize or sell any property, and the debtor can keep all of their possessions. This outcome is possible because the exemptions protect the debtor's assets.
Exemptions can be complex, but a proper legal support can help ensure that you keep assets after filing for Chapter 7 bankruptcy.
The net equity calculation in a Chapter 7 bankruptcy determines whether the custodian sells an asset to repay the creditors. The net equity of an asset is determined by subtracting all outstanding liens from its fair market value.
For instance, if you have a vehicle worth $15,000 and an outstanding loan of $16,999, there is no net equity in the car as the loan amount surpasses the vehicle's value. In this case, the custodian would abandon the car and not sell it.
However, if the loan amount is lower, say $10,000, then the net equity in the car would be $5,000. In this scenario, the custodian would sell the car, pay off the loan, and use the remaining $5,000 to pay your debts.
The net equity amount also considers the bankruptcy exemptions allowed in your state. If the permitted bankruptcy exemption is equal to or greater than the net equity, then the asset is protected and not sold by the custodian.
Federal and State Bankruptcy Protection Through Exemptions
The US Bankruptcy Code outlines exemptions that debtors can use to shield their assets during a Chapter 7 bankruptcy case. These exemptions are designed to ensure that people who file for bankruptcy still have access to the necessary resources to maintain their basic living standards.
The federal exemption protects some amounts in certain assets, but there is no specific exemption for cash. The federal exemptions are reviewed and updated every three years. This is to ensure that the exemptions keep pace with inflation and the cost of living. Therefore, people who file for bankruptcy can continue accessing the resources they need to rebuild their financial lives.
While no specific cash exemption is listed in the federal bankruptcy exemptions, a wildcard exemption allows you to protect up to $1,325 in any property and use up to $12,575 of any unused portion of a homestead exemption to protect money.
Cash can take many forms, including physical cash, money in a bank account, or even money held by a friend.
Understanding state bankruptcy exemptions
In the United States, states can determine the exemptions available in bankruptcy cases filed within their borders. Some states allow defaulters to choose between federal and state bankruptcy exemptions, while others only mandate using state exemptions.
Exemptions determine the property and assets a debtor can keep in a bankruptcy case. Thus, the choice between state and federal exemptions can significantly impact the case's outcome.
The state's exemption laws will apply if you have lived in a particular country for 730 days or more before filing for bankruptcy. On the contrary, if you have not been living in the same state for two years, the state you've lived in for a more significant period will be the one with applicable exemption laws.
What to Expect If You Exceed Cash Limits During a Chapter 7 Filing
If your cash exceeds the allowed exempt amount, you may have to surrender it. If the non-exempt cash amount is small, the Chapter 7 custodian may choose not to seize it if there are no other assets to sell. It depends on both the non-exempt cash amount and your unsecured debt amount.
Exploring Alternatives to a Chapter 7 Bankruptcy
Before filing for Chapter 7 bankruptcy, it is crucial to understand the exemptions available to you and determine whether any of your assets may be subject to seizure by the Chapter 7 custodian. Understand tips and tricks to filing Chapter 13 bankruptcy.
You can use our free Means Test Calculator to determine your eligibility requirements. Another option is our Savvy Debt Payoff Planner, which helps you create a reasonable plan to settle your debt effectively.
Our Debt settlement guide provides in-depth information on debt relief alternatives. If you'd like to engage us further, don't hesitate to contact us.