Very few people want to file for bankruptcy. Unfortunately, bankruptcy is the best option available to address significant debt or foreclosure in many situations. One of the first questions every potential debtor has is, “what can I keep?” This is especially true if they have a substantial amount of cash holdings. Our Sacramento bankruptcy attorney from The Bankruptcy Group looks at ways to protect cash holdings below.
Are Cash Holdings Part of the Bankruptcy Estate in California?
Before filing for bankruptcy, it is important to understand that the property you own becomes part of the “bankruptcy estate.” The bankruptcy estate also includes any cash holdings or savings you have. To eliminate the bulk of your debt, you allow the court to have temporary control over these assets.
In a Chapter 7 bankruptcy, a court-appointed trustee will evaluate the assets in the bankruptcy estate. If there is non-exempt property, it will be sold and the proceeds distributed among your creditors. If there are any cash holdings, any non-exempt cash will have to be turned over to the trustee. In a Chapter 13 bankruptcy, any non-exempt cash holdings will be calculated into your monthly bankruptcy payment.
Protecting Your Cash Holdings in a California Bankruptcy Case
When you file for bankruptcy, either Chapter 7 or Chapter 13, you are entitled to protect certain assets through provisions in the law known as exemptions. If the property is exempt, it does not have to be turned over to the trustee in a Chapter 7 case and it does not influence your monthly payment in a Chapter 13 bankruptcy. The ultimate goal of bankruptcy is to help a debtor achieve a fresh financial start, which would be impossible if they lost all their property after filing.
Bankruptcy exemptions apply to the equity of an asset. Equity is the actual value of the property or the sale value of the asset. For example, you might own a vehicle that was worth $20,000 on the date purchased. However, the car might have depreciated down to $15,000 by the time that you filed for bankruptcy, and there could be, for example, an outstanding $10,000 loan on the vehicle. Therefore, you would only have to exempt $5,000, which is the profit that you would make if the car was sold today to pay off the loan.
However, cash does not work the same way as other assets. The value of $15,000 in cash holdings is $15,000. Because cash does not depreciate and there are no loans against it, to exempt your cash holdings, you must have enough exemptions to protect the full amount.
California’s Two-Tier Exemption System and Keeping Cash Holdings
In many states, debtors have the choice between their state exemptions and the federal bankruptcy exemptions. If you are a resident of California, you are not permitted to use the federal exemptions.
California is the only state that offers two separate systems of exemptions. You have a choice between each set, but you are not allowed to pick and choose between the two systems. Our California bankruptcy attorney will work closely with you to help determine which set of exemptions will best protect your property, such as cash holdings.
The “Homestead Exemptions” is the first system of exemptions available to California residents. In cases where an individual or couple has significant equity in their home, this is the system of exemptions that protects that equity. Unfortunately, there are no provisions to protect cash holdings under this system.
The second system of exemptions is typically called the “Wildcard Exemptions.” This is the system chosen by most debtors who do not have substantial equity in their homes or have other properties they want to protect. The wildcard system allows debtors flexibility in safeguarding assets, including cash holdings, that are not specified by a particular exemption.
The wildcard exemption could be applied to any property, including cash holdings. Under California law, the wildcard exemption is limited to $1,550 plus any unused portion of the homestead exemption, for a potential total of $30,825 if the debtor does not use any of the provided homestead exemption. Therefore, depending on your other property and the equity in your home, you could protect a substantial amount of cash holdings.
Should I File for Chapter 7 or Chapter 13 to Keep My Cash Holdings in California?
Our California bankruptcy attorney will be able to sit with you and help determine what type of bankruptcy would be best considering your situation. While protecting the most considerable portion of your cash holdings might be a concern, there are probably other factors driving your need to file for bankruptcy.
However, if you have non-exempt cash holdings that you want to keep, you will need to file for Chapter 13. Non-exempt cash holdings will impact your monthly trustee payment. For example, suppose you have $15,000 in non-exempt cash holdings. By filing for Chapter 13 in this case, you can avoid turning the money over to a Chapter 7 trustee. Now, the $15,000 will be factored into what you must pay over the three to five years of your Chapter 13 bankruptcy.
For the sake of simplicity, this calculation will not include any potential attorney’s fees paid through the bankruptcy or the percentage paid to the trustee – it will just look at your debt. In your bankruptcy, you include $65,000 of unsecured debt and a $7,500 tax obligation. If you did not have the $15,000 in cash holdings, you would have otherwise qualified for a Chapter 7. This means you would not have had to pay any unsecured creditors.
The first debt to consider is the tax obligation. Because tax debt usually must be paid through the bankruptcy, you will have to pay the full $7,500 through your bankruptcy plan. Because you want to retain the non-exempt $15,000 in cash holdings, you also must pay that amount to your unsecured creditors. Therefore, you will have to pay a total of $22,500 over the life of your plan. The remaining $50,000 of unsecured debt will be discharged once you have completed your bankruptcy. While you are still paying the $15,000 to your creditors, you are doing so over a few years instead of one lump sum payment. Doing it this way allows you to have control over the money.
Of course, the above is a simple case and very few, if any, bankruptcies are as cut and dry as the example. In addition to other debts, most people have other assets they want to protect. There also is the means test, or calculation of disposable monthly income, that could impact your case. It is essential to talk to our California bankruptcy attorney before filing for bankruptcy.
Call Our California Bankruptcy Attorney to Discuss Protecting Your Cash Holdings
Bankruptcy provides a means for people to get a fresh start. However, while it is not meant to punish a person, it does require some sacrifice. It is critical to speak with our experienced California bankruptcy attorney to understand how your debt and assets, including your cash holdings, will be handled in a bankruptcy. There is no one right way to file and, at The Bankruptcy Group, our Roseville bankruptcy attorneys are dedicated to ensuring you receive the most benefit from filing. Call 800-920-5351 to schedule a free, confidential appointment.