Protecting Cash In An Indiana Or Illinois Bankruptcy

Fear of asset loss is one of the most frequently cited reasons when delaying a necessary bankruptcy filing, and in most cases, this fear is almost completely unfounded.

Even in Chapter 7 liquidation bankruptcies, most consumer assets are legally exempt from creditor seizure. The purpose of the Bankruptcy Code is to give the debtor a fresh start, and if the debtor loses assets, the debtor will essentially be behind the starting line, an outcome that is contrary to the law’s intent. As a result, through some careful planning and thoughtful legal arguments, it’s possible to retain most all assets, including cash, in a Chapter 7 or Chapter 13 bankruptcy.

What the Law Says

Both Indiana and Illinois require debtors to use state bankruptcy exemptions instead of federal ones. Although federal exemptions are generally considered to be more generous towards debtors, that is not always in the case.

Both The Hoosier State and The Land of Lincoln have rather large wildcard exemptions that can be applied to any of the debtor’s property, including cash or a cash equivalent. Indiana bankruptcy debtors have a $10,500 wild card, but much of this exemption must be applied to motor vehicles and personal property, as these exemptions are either limited or nonexistent. Conversely, Illinois debtors can often apply most of their $4,000 wild card exemption to cash.

Pre-Filing Strategies

One of the most obvious ways to deal with cash in a savings account or stock portfolio is to apply it elsewhere before the filing. Some people prepay creditors to accomplish this objective. While this strategy is not in and of itself fraudulent, the debtor must list any such prepayments in the Statement of Financial Affairs.

If all creditors are not prepaid equally, bankruptcy trustees (individuals who oversee bankruptcies) often object to such payments as a creditor preference. It is theoretically possible to avoid such objections by paying all creditors equally, or at least proportionally. However, this is a time-consuming exercise that makes little sense in some areas, because there is no reason to pay down dischargeable debts, like medical bills.

Although it is probably not a good idea to move cash to an exempt account, like a 401(k), it is a good idea to transfer cash to fixed assets, by putting a new roof on the house, buying new tires for the car, and so on. Usually, the trustee either does not scrutinize arms-length, for-value commercial transactions, or at least does not scrutinize them very closely.

Post-Filing Arguments

Per the Bankruptcy Code, all nonexempt assets that the debtor owns are subject to seizure, and there is a compelling case to be made that people do not “own” cash in the everyday sense of that word.

About three-quarters of Americans essentially live paycheck to paycheck, which means that by the time money hits the bank, it is either already spent or already committed to one moneylender or another. So, many people do not control their cash flow, and control is one of the key components of ownership. As a matter of fact, by the time the trustee files a motion to recover any cash listed in Schedule B, the debtors have probably already spent much or all of it on living expenses.

The mootness doctrine says that a court cannot rule on issues like these, because since the cash is gone, there is no longer a dispute for the judge to resolve.

Reach Out to Experienced Attorneys

Most assets, even cash, re exempt in bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. After hours appointments plans are available.

Resources:

money.cnn.com/2013/06/24/pf/emergency-savings/

federalpracticemanual.org/chapter3/section3