If you have too much cash, you may lose some or all of it in bankruptcy proceedings. Bankruptcy is meant to provide relief to debtors in financial distress, so if you have a lot of cash, the court may question why you aren't paying your creditors. Most state laws allow for exemptions, which helps determine the amount of cash you can have during bankruptcy. The type of bankruptcy you file is also a factor.
Chapter 13 Bankruptcy Allows You to Keep Your Assets
If you have a lot of cash on hand that you want to preserve during bankruptcy, filing Chapter 13 may be your best bet. Chapter 13 allows you to keep all of your assets, even if you have $1 million in cash in the bank. In return, the court asks you to pay at least some of your debt back over the next three or five years. Having a high cash balance may influence the size of the monthly payments you'll have to make, but you won't be at risk of losing your cash if you file Chapter 13.
Chapter 7 Bankruptcy Offers Cash Exemptions
Filing Chapter 7 bankruptcy is generally easier, faster and cheaper than filing Chapter 13, and you won't have to make any payments to your creditors. The downside is you put your cash on hand and other assets at risk. In place of monthly payments to creditors, the court will look to seize and liquidate your assets in Chapter 7. You can use bankruptcy exemptions to protect some of your assets in Chapter 7, including your cash on hand, but the amount you can protect is different in every state. Many states have little-to-no specific protection for cash on hand, and perhaps $1,000 or more in exemptions for "miscellaneous property," which you can use to protect your cash. If you can't exempt your cash, you will lose it to your creditors in Chapter 7.
Some States Allow Chapter 7 Wage Exemptions
When you file Chapter 7 bankruptcy, you might lose some of the wages you have earned, but have not yet been paid, as well. Most states have a separate exemption for unpaid wages, separate from the cash-on-hand exemption, if any. When those wages come in, you have to surrender the non-exempt amount to the bankruptcy court. Wage protections vary dramatically by state, but most states exempt about 75 percent of earned but unpaid wages. Pennsylvania exempts 100 percent of earned but unpaid wages, but you can only protect 40 percent of such wages in Michigan, or 60 percent for a head of household.
Cash Protected Through Exemption May be Lost Through Right of Setoff
Even if you can protect your cash through a bankruptcy exemption, you may lose it to a creditor through the right of setoff. If you have money on deposit with the same institution from which you have borrowed money, that creditor can usually seize your deposit assets to offset the loan. For example, if you have a checking account with the same bank that you owe money to on a credit card, when you file bankruptcy the bank may seize your cash in the account to offset your credit card debt.
- Nolo.com: Bankruptcy FAQ (Chapter 7 and Chapter 13)
- TheBankruptcySite.org: Bankruptcy In Your State
- U.S. Department of Justice: Setoff and Recoupment in Bankruptcy
- LegalConsumer.com: 50 State Homestead Exemptions & Other Bankruptcy Exemptions
- Nolo: How to File Bankruptcy in Michigan
- Nolo: How to File Bankruptcy in Pennsylvania
- American Bankruptcy Institute: Establishing the Requirements Necessary in order to Enforce Setoff in Bankruptcy Proceedings