How Do I Make Sure the Chapter 7 Trustee Won’t Take My Property?

In a chapter 7 bankruptcy, you are required to turn over to the trustee nonexempt (unprotected) property that you own at the time of filing.  So before you file for bankruptcy, it’s wise to limit the value of your unprotected property by doing some advanced planning. 

The most common assets trustees look for include:

(1) Cash
(2)bank accounts
(3)Prepaid Rent.
(4) landlord and utility deposits
(5) accrued earnings and benefits,
(6)Tax Refunds and
(7) Sporting Goods

Cash Your best bet is to have no cash on hand when you file your chapter 7 bankruptcy. Further, if you have received cash or a paycheck or closed a bank account shortly before filing your case, you should use those funds before filing your bankruptcy. You must use those funds for valid purposes and keep receipts so you can prove the funds were properly used.

Money that you gain control of shortly before filing your chapter 7 bankruptcy may be used for (1) food, (2) groceries, (3) the chapter 7 filing fee, (4) the attorney’s fee in the chapter 7 case, and (5) the payment to creditors whose claims you intend to reaffirm and continue paying after filing bankruptcy.  Do not make gifts or loans to friends or relatives, however, because the trustee may later seize these payments.

Bank Accounts. You should close all bank accounts before filing a chapter 7 bankruptcy. If a bank account is not closed, the account balance should be as close to zero as the bank allows and all outstanding checks must clear the account before the bankruptcy is filed. Here’s why: If you have written a check to someone for, say, $50 — and if the check has not cleared when the case is filed — the $50 in the account to cover the outstanding check will be deemed an asset and will have to be paid to the trustee.

Prepaid Rent If you pay your rent on the first day of the month — and if you file your chapter 7 case on the tenth day of the month — the portion of the rent covering the last 20 days of the month, if not exempt, will be deemed an asset and you will later have to pay it to the trustee. If possible, you should make arrangements with the landlord to pay rent only through the filing date and to pay the balance of the rent from money you acquire after the case is filed. If this is not possible, the case should be filed near the end of the rent period. Unless these deposits are exempt, you should try to get a refund of all landlord and utility deposits before filing your chapter 7 bankruptcy. Otherwise, you will have to pay the deposits, or the amount of the deposit, to the trustee.

Accrued Earnings and Benefits. In most states, and under federal law, only a certain percentage (usually 75%) of your earnings are exempt. Therefore, the trustee may be allowed to take the nonexempt portion (usually 25 percent) of any accrued and unpaid wages, salary, commissions, vacation pay, sick leave pay, and other accrued, nonexempt employee benefits. This means the best time to file a chapter 7 bankruptcy is the morning after payday.

Even then, if the pay period does not end on payday, the person may have accrued earnings unless special arrangements are made with the employer. If your annual leave, vacation pay and other nonexempt employee benefits are convertible to cash, you should collect them before filing your chapter 7 bankruptcy.

Tax Refunds. If you expect a tax refund, you should file your chapter 7 case after you receive and properly spend your refund.  The best strategy is to either file the chapter 7 case early in the tax year (but after the refund from the previous year has been received and spent) or make arrangements to insure that there will be no tax refund for that year.

Sporting Goods You should dispose of all nonexempt sporting goods prior to filing your bankruptcy, especially if they are uniquely valuable. These include guns, fishing gear, skis, cameras, and similar items. Otherwise, you’ll have to turn over the items — or their value in cash — to the trustee.

If you want more information about bankruptcy and non-bankruptcy options, talk with an experienced financial rescue and bankruptcy lawyer.