When debts become overwhelming, debtors may turn to bankruptcy to give them a fresh start. Depending on the type of bankruptcy case filed, a debtor could lose some of his assets because they are sold to pay his creditors. However, many assets, including cash and future income, may be exempt under state or federal laws.
Chapter 7 Vs. Chapter 13
An individual debtor can file for bankruptcy under Chapter 7 or Chapter 13 of the bankruptcy code, and the type of bankruptcy a debtor files impacts the way his property is handled. In a Chapter 7, or liquidation, bankruptcy, the debtor’s nonexempt property is sold to pay his creditors. However, state or federal exemptions may make a significant portion of the debtor’s property ineligible for sale. Chapter 13, or debt adjustment, bankruptcy involves a repayment plan whereby a debtor repays many of his debts over a three to five year period. The issue of cash being seized applies mostly to Chapter 7 bankruptcies where cash can be taken to repay debts.
Whether a debtor gets to keep certain assets, including cash, depends on whether an exemption removes that asset from eligibility for sale. Both federal and state laws have bankruptcy exemptions, but these exemptions vary between states. Some states allow their debtors to choose from both lists of exemptions, but others do not. In many states, a debtor can exempt a certain amount of equity in his home, so his home may not be sold as part of his bankruptcy case.
Many states exempt some amount of cash from bankruptcy cases, including income earned but not yet received at the time the case is filed. For example, Alaska exempts a certain amount of continuing earnings depending on whether there are one or two wage earners in the household. Massachusetts permits debtors to exempt cash for utility expenses, food and rent. Oregon allows debtors to keep cash for property that is sold if that property was exempt. Some states have a wildcard exemption that allows debtors to apply an exemption to any type of personal property, up to a certain amount. Debtors can apply the wildcard exemption to cash in addition to the amount that can be exempted under a cash exemption.
Claiming Cash Exemptions
Claiming a cash exemption may impact the debtor’s ability to claim other exemptions. For example, a debtor who claims an exemption for a certain amount of cash may not be able to claim as much of an exemption for his home or property in another category. For example, a state may permit debtors to claim up to $10,000 total for household goods, including cash, so if a debtor claims $9,000 in cash he may lose a significant portion of his household goods.