Protecting Cash In Bankruptcy

Both Illinois and Indiana have wildcard exemptions that can be used on any otherwise non-exempt property, like savings accounts, rental property, vacation homes, boats, and so on. Although the dollar values are relatively high ($4,000 in Illinois and $9,350 in Indiana), they may be insufficient to cover a large amount of inherited cash, which is normally not exempt, or an inherited retirement account, which is almost never exempt.

So, many Chapter 7 and Chapter 13 debtors have cash to protect. Some people are tempted to “loan” cash to a friend or relative, but such efforts are typically red flags for the trustee. What are some ways to preserve this asset?

Ownership and Procedural Issues

Legally, all the debtor’s nonexempt property belongs to the bankruptcy estate at the moment of filing. But commerce often moves faster than the bankruptcy trustee, who is charged with overseeing the case and acting in the best financial interests of the creditors. Assume Dennis Debtor files a voluntary petition that shows $2,000 in cash, but the bank has yet to process his most recent mortgage payment, even though the payment was initiated several days before.

This situation is commonly known as the floating check controversy. The $2,000 may be in Dennis’ account, but it is not really his money, because if he spends it, the payment will bounce. However, the trustee is likely to file a motion for turnover anyway, because the Bankruptcy Code makes no provisions for funds in transit.

Mootness also comes up occasionally. In order for the court to decide an issue, there must be an actual controversy, at least in most cases. Assume Frank and Jesse each claim ownership of valuable stock shares. They cannot agree and ultimately ask a judge to intervene. But before the court can rule, the company goes out of business and the stock becomes worthless. Therefore, the ownership question is moot.

The same argument can be made in a motion for turnover regarding cash. If the trustee demanded that Dennis turn over the $2,000, the money will almost surely be gone by the time the judge hears the matter. At that point, it does not matter whether Dennis or the bankruptcy estate owned that property, because the cash is no longer there.

Preserving Cash

There are certainly some procedural and legal arguments in this area. However, the best way to deal with cash in a bankruptcy is often to spend it on exempt assets. Put a new roof on the house, get new tires for the car, or contribute it to a retirement account. The cash no longer appears on Schedule A, and that is the end of the matter.

Some people think that pre-paying bills is a good way to dispose of cash, but unless all creditors are paid equally, overpayment is generally considered to be an illegal preference.

Reach Out to Seasoned Lawyers

To take the first step towards the financial fresh start guaranteed in the Bankruptcy Code, contact an experienced bankruptcy lawyer in Chicago from the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.