Is the Cash in My Bank Accounts Exempt in Bankruptcy? (2024)

In bankruptcy, keeping the cash you've deposited in a bank account isn't easy. Any cash or money you have in the bank on the day you file for bankruptcy becomes property of the bankruptcy estate, and keeping it will depend primarily on your state's exemption laws.

Protecting Cash and Bank Accounts With Exemptions

If you don't want the trustee to take your cash or money in the bank, you must be able to exempt those funds. Almost every state has a set of bankruptcy exemptions, so exemption amounts vary greatly depending on where you live.

You'll want first to look for an exemption specifically designed to protect bank accounts or the source of the funds in the account. If your state doesn't have one or it won't fully cover the balance, your state might offer a wildcard exemption you can use to protect any property of your choice. But be sure to check the exemption conditions. Some wildcard exemptions can't be applied to cash or bank accounts.

Another option is determining whether your state will allow you to use the federal bankruptcy exemptions because the federal exemption set has a substantial wildcard exemption. However, you can't select exemptions from both sets. You'll want to pick the set that will protect the most important property to you.

Spending Cash and Bank Account Funds Before Filing for Bankruptcy

If you can't exempt your cash or bank account funds, you can spend the money on necessities such as food, rent, or gas before filing your case. Keep track of your spending in case the trustee asks for an accounting, and use the money for essentials, such as car repairs. Don't attempt to pay your rent or other bills in advance for amounts not yet due because the trustee could recover the payments.

As long as you're spending a reasonable amount of money on typical living expenses, you shouldn't run into a problem. This would not constitute an attempt to reorganize your assets to take full advantage of your exemptions, commonly referred to as prebankruptcy planning. Prebankruptcy planning occurs when a debtor converts a nonexempt asset—cash in this case—into an exempt asset, such as home equity.

While courts allow debtors to engage in a reasonable amount of exemption planning, excessive or systematic spending or conversion of assets can lead to allegations of bankruptcy fraud. However, bankruptcy fraud would be more likely if you attempted to hide the funds instead of using them on living expenses, so keep good records. Supporting yourself and your family with the money available for as long as possible is perfectly fine. It's what most people do while trying to find a way to avoid bankruptcy.

Learn more about protecting your bank account in bankruptcy.

Your Cash and Bank Accounts in Chapter 7 Bankruptcy

Cash in a bank account is one of the first types of assets a Chapter 7 bankruptcy trustee will look for when you file for bankruptcy. Why? As discussed above, most states don't allow filers to protect much cash in a bank account—and it's easy to find.

The trustee will likely ask you for a bank statement reflecting the balance on the filing date. You'll need to protect the entire balance with a bankruptcy exemption. The trustee won't be swayed by an argument that the balance should be considered lower because of outstanding checks or upcoming automatic withdrawals. You'll have to turn over any amount you can't protect with an exemption.

In Chapter 7, the trustee will distribute nonexempt cash in a bank account and any sales proceeds derived from other nonexempt property to your creditors. Exempt all funds before filing your case or, as discussed above, use bank account funds before you file on necessary items, like food, rent, and utilities. Finally, wages you earn after filing for Chapter 7 aren't part of the bankruptcy estate, so they aren't at risk of being lost, but those you earned before filing and didn't yet receive might be.

Learn more about your property in Chapter 7 bankruptcy.

Your Cash and Bank Accounts in Chapter 13 Bankruptcy

People with a large amount of cash, money in a bank account, or funds in a nonexempt investment account often don't benefit from filing for Chapter 13 bankruptcy. Why? Because filers must pay creditors an amount equal to the value of any property they can't protect with an exemption through the Chapter 13 repayment plan.

This rule ensures that creditors get at least as much in a Chapter 13 case as in a Chapter 7 case. So, a debtor with $10,000 in nonexempt cash and deposit accounts would pay at least $10,000 to creditors (minus the trustee fee) in both Chapter 7 and Chapter 13.

Keeping Exempt Cash in a Separate Bank Account

Certain assets, such as Social Security benefits, are exempt under federal law. The bankruptcy trustee usually can't go after that money to satisfy your creditors. However, be aware that you must be able to trace the funds and show they are exempt Social Security benefits.

If you combine exempt funds with nonexempt money, it will be hard, if not impossible, to protect the funds in bankruptcy. However, showing the exempt source won't be a problem if you have a separate account for exempt funds. So, keep Social Security funds separate.

Find out why withdrawing retirement funds before bankruptcy is usually a bad idea.