What happens to my cash in bankruptcy?
Maybe you have a retirement account or a savings account for your child’s college tuition. Maybe you have an emergency fund. Whatever the goal, you don’t want to see your savings disappear when you file for bankruptcy. You file to repair your finances, not to destroy your savings. What happens to that cash when you file for bankruptcy? The answer depends on which sort of bankruptcy you’re filing.
Under Chapter 7, or “liquidation” bankruptcy, the bankruptcy trustee can sell your non-exempt assets and use the proceeds to pay back your creditors (as a practical matter, the vast majority of the clients we represent don’t lose any of their property). The goal is to maximize repayment to your unsecured creditors. If you have non-exempt cash sitting in accounts, that cash will become part of your bankruptcy estate along with the rest of your belongings and the trustee will use it to repay creditors. Exempt cash, however, is safe from your creditors.
So, what qualifies as exempt cash? First, your bankruptcy exemptions may be sufficient to cover whatever cash you have. Cash generally falls under a “wildcard” exemption. New Jersey doesn’t have a wildcard exemption, but bankruptcy filers in New Jersey do have the option to use federal exemptions. The federal wildcard exemption covers $1,225 of any property, plus up to $11,500 of the unused portion of your homestead exemption. Talk to an experienced bankruptcy attorney to determine which set of exemptions best suits you.
If you’re using all of your homestead exemption, you need to protect other assets with the wildcard exemption, or both, you may still be able to keep your cash. Cash from certain sources is automatically exempt. Your retirement accounts, unemployment benefits, social security benefits, and payments from personal injury lawsuits are automatically exempt. If you can trace your cash back to any of those sources, your cash will be safe from your creditors, with one exception. If you have IRAs or Roth IRAs worth a total of more than $1,245,475, the remainder over that amount may be vulnerable to the trustee.
Under Chapter 13, you’ll work with a bankruptcy trustee and your creditors to create a five-year repayment plan. This plan will account for continuing car and mortgage payments (if you have them) and your living expenses. Whatever disposable income is left over after expenses must be paid to unsecured creditors such as your credit card company.
While the trustee won’t empty out your bank account, you’ll still have to pay the value of non-exempt assets (including cash) to creditors. Under Chapter 13, you’re required to pay creditors at least as much as they would have gotten had you filed under Chapter 7. In Chapter 7, your non-exempt cash becomes part of your bankruptcy estate and is distributed among your creditors. So, you’ll have to pay the amount of your non-exempt cash to creditors over the life of your Chapter 13 plan. That means you’ll have to make higher monthly payments than you otherwise would and you won’t be able to save any more during the course of your bankruptcy.
Your Retirement is Safe; We’re Talking About Liquid Assets
Your safety net of retirement accounts and public benefits is safe in bankruptcy. You only need to worry about cash sitting in, for example, your savings account or your investment portfolio. If you have so much cash on hand that you’re concerned about exempting it in bankruptcy, you may want to consider using some of that cash on necessary living expenses, such as groceries or rent.