Do You Have Too Much Money and Too Many Non-Exempt Assets to File Bankruptcy?
Contrary to popular myth, bankruptcy debtors do not automatically lose their non-exempt assets, even in Chapter 7 liquidations. The trustee (a court-appointed bureaucrat who oversees the case on behalf of the judge) is under no duty to perform such random seizures. Instead, the bankruptcy trustee must examine non-exempt assets and determine if it is worthwhile to sell them and distribute the proceeds among the creditors.
Many times, this analysis leads to favorable results for debtors (people who file voluntary bankruptcy petitions). Additional vehicles – like fishing boats, campers, motorcycles, restoration cars, and so on – are a good example. If it is newer, the vehicle often has a high loan balance and almost no equity. If it is older, the property often needs substantial work to get it in a salable condition. Moreover, bankruptcy trustees are not salespeople, and they have little or no interest in taking possession of a somewhat beat-up bass boat, storing it, fixing it up, finding a buyer, and doing all the other legwork required. This same analysis often applies to rental homes and other non-exempt property.
But cash is different because it is liquid, has a readily ascertainable value, and requires no storage or fix-up. So, protecting cash is often a priority in both Chapter 7 and Chapter 13 bankruptcies. Essentially, there are two steps in this process.
Who Owns Your Cash?
The moment that debtors file voluntary petitions, all their non-exempt property becomes part of the bankruptcy estate that’s managed by the bankruptcy trustee. So, ownership is an important question.
In practical terms, most people are more like trustees than owners when it comes to cash in DDAs (demand deposit accounts). In a general legal sense, a trustee is someone who has physical possession of property, but must manage it in a way that favors a third party. Debra Debtor may earn $4,000 a month, but nearly all of it goes to pay regular bills and she has very little disposable income. Over the years, some have made the argument that Debra does not “own” the money in her checking account, even though it is in her name. Although this position does have some logical force, courts have consistently rejected it.
A more compelling argument, and one that courts have at least occasionally embraced, is the floating check controversy. Back in Ye Olden Days, when people manually wrote paper checks to pay for almost everything, Debra might write a $1,000 check on a certain day, and it may be several more days, or even several more weeks, before the payee presented the check at Debra’s bank for payment. During that time, the check was “floating,” because although the $1,000 was still in Debra’s account, it wasn’t really hers to spend.
Now, assume that Debra wrote that check on March 1 and filed bankruptcy on March 3, before the check cleared her bank. The trustee might look at the balance on March 3 and think that Debra had $1,000 of non-exempt cash in her bank account, but that money had to stay in the account or else the check would bounce. It is impossible for Debra to get the fresh financial start that the Bankruptcy Code guarantees if she must deal with a hot check case because of her filing.
Many people don’t even have checkbooks anymore, but the idea remains. The 21st century equivalent is probably auto-pay bills or pre-scheduled ACH debits. Under these arrangements, the bank automatically writes the check on a certain day or the creditor automatically pulls out money on a certain day. So, there may be an extra $1,000 in Debra’s account on March 3 (the filing date), but if there is an ACH withdrawal scheduled for March 4, the money does not belong to her, in the ordinary sense.
Mootness is a related idea. This doctrine essentially states that, in most cases, there must be a live controversy for a judge to decide. Assume Bill and Frank both claim ownership of a house. They cannot agree, and Bill files suit. But before the judge hears the case, the house burns down. Now, the point is moot. It doesn’t matter who owned the house, because the house is gone.
Money in a DDA is a lot like that house. Debra has money in her account before filing, but by the time the bankruptcy judge hears the dispute, the money has been spent on bills. So, it doesn’t matter whether the bankruptcy estate or Debra owned the funds, because they are gone.
Exempting Cash in a Bankruptcy
Under Georgia law, debtors may exempt up to $600 in otherwise non-exempt property, under 44-13-100(a)(6). Additionally, if they do not use the entire amount, homeowners may use up to $5,000 of their homestead exemption for cash or other non-exempt property.
That sounds like a lot of money, and in most cases it is a lot of money, but the math doesn’t always work out favorably. Non-homeowners are obviously limited to $600, and homeowners who have been making on-time payments for more than eight or ten years will almost certainly use the entire homestead exemption.
Failing to report the cash on the schedules is bankruptcy fraud, and the U.S. Department of Justice aggressively prosecutes these cases. “Loaning” excess cash to your sister-in-law so it disappears from your account is also fraudulent. Prepaying regular creditors, like making three mortgage payments in one month, is likewise illegal unless you prepay everyone in proportional amounts.
One of the best ways to handle this situation is to spend excess cash on exempt assets. Put new tires on the car or put a new roof on the house. As long as the transactions were arms-length and market value, there should be no red flags.1414
Your bankruptcy attorney will be able to advise you about other approaches that may save you some money and assets.