Everything you own at the moment your petition is filed belongs to the bankruptcy estate unless an exemption covers it. That includes your checking balance, an uncashed paycheck, and a tax refund you haven't received. System 1 protects 75% of wages paid in the prior 30 days but has no wildcard for cash. System 2's wildcard covers roughly $35,000 for most renters. Timing the filing solves most of the rest.
The snapshot
A bankruptcy petition is a photograph. Whatever exists at the second it's filed is in the frame, and whatever you earn or receive afterward, with a few exceptions, is not.
That has consequences people don't expect. The rent check you wrote on the first that hasn't cleared by the third still counts as money in your account. A paycheck deposited on Friday is in the frame if you file Monday. So is a refund for a tax year that ended before you filed, even if the IRS won't send it for three months. The trustee will read the bank statement covering the filing date line by line.
None of this means the money is lost. It has to be covered by an exemption, and which exemptions exist depends on the system you chose, as laid out on the California exemptions overview.
Wages
Your paycheck came in on Friday and you're filing next week. Under System 1, CCP § 704.070 exempts 75% of earnings paid to you within the 30 days before filing, provided the money is traceable, meaning it's still sitting in the account it was deposited to and hasn't been mixed with other funds beyond recognition. If wages were being garnished when they were paid, the whole of the garnished amount can be exempt.
Wages you've earned but haven't yet been paid are also estate property on the filing date, at least the portion earned before filing. A biweekly paycheck that arrives three days after filing is partly pre-petition. Trustees rarely chase a partial paycheck, but it's listed.
Under System 2 there's no separate wage exemption. Cash from wages is covered by the wildcard along with everything else. For most renters that's a better deal, because the wildcard covers 100% of the money rather than 75%.
Tax refunds
The refund is the asset trustees in the Central District look at most carefully, because it's easy to find and easy to collect. A trustee can simply ask the IRS to send it to the estate.
The rule is proration. If you file on October 1, roughly three-quarters of the refund for that tax year was earned before filing and belongs to the estate. File on January 15, and the entire prior-year refund is in the estate, plus a sliver of the new year's. File in April after the refund has arrived and been spent on rent and groceries, and there's nothing to prorate.
Under System 1 an exposed refund is exposed, full stop. There's no wildcard to put it under. Under System 2, the wildcard exemption absorbs it easily in most cases. California law also separately protects earned income tax credit money, which matters for families that count on it every spring.
For a System 1 homeowner expecting a $6,000 refund, the practical answer is usually to file after the refund has arrived and been spent on ordinary living expenses. Not on a gift to a relative. Not on paying back a friend. Rent, food, car repairs, the attorney fee, insurance.
Cash in the bank on filing day
System 1 has two provisions for money in a deposit account. CCP § 704.220 exempts a modest amount automatically, currently in the neighborhood of $2,000 and indexed, without any showing. CCP § 704.225 exempts money in an account to the extent it's necessary for the support of you and your family, which is a judgment call the trustee can contest. Beyond that, a System 1 filer's bank balance is exposed.
Under System 2 it's simple: the wildcard covers the balance, up to the roughly $35,000 available to most renters. A checking account with $6,000 in it is a non-event.
| Money on filing day | System 1 | System 2 |
|---|---|---|
| Wages paid in prior 30 days | 75% exempt if traceable (§ 704.070) | Wildcard |
| Other cash in a deposit account | Modest automatic amount (§ 704.220), plus what's necessary for support (§ 704.225) | Wildcard |
| Pending tax refund, pre-filing portion | Exposed, except EITC money | Wildcard |
| Social Security in a separate account | Fully exempt | Fully exempt |
| Cash under the mattress | Exposed | Wildcard |
| Security deposit held by landlord | Exposed | Wildcard |
Social Security deserves its own line. Benefits are protected under federal law in either system, and keeping them in a dedicated account, with nothing else deposited into it, makes that protection easy to prove.
Timing the filing
Most cash problems are solved by a calendar, not an exemption. If your account swells on the 1st and the 15th and empties by the 10th and the 25th, file on the 10th or the 25th. Refund coming? File after it's spent. Bonus due in March? File in April.
What "spent" means matters. Ordinary living expenses are fine and expected. So is paying the Chapter 7 attorney fee and the $338 court fee, which is why the fee gets paid before filing (a fee still owed would be discharged along with everything else; the breakdown of what bankruptcy costs explains the mechanics). Prepaying rent for six months, buying a $4,000 watch, or handing $3,000 to your sister is not fine. Paying back a family loan in the year before filing is a preference the trustee can recover from the family member. Paying back any creditor more than $600 in the 90 days before filing can be too.
And don't move money around to hide it. The trustee gets the statements. A $5,000 withdrawal three days before filing with no explanation is a question you'll be answering under oath on Zoom, and the honest answer is always cheaper than the alternative.
What the trustee asks about money
At the 341 meeting the trustee will have your bank statements and your last two tax returns. The questions are predictable. What was the balance on the filing date? Have you received a refund since filing? Are you expecting one? Did you pay anyone back in the last year? Did you transfer anything to anyone?
Naomi attends every one of these meetings, and the clients who have the easiest time went through their statements with her beforehand and can explain every large transaction. There's nothing sinister about a $1,200 transfer to savings. There's something awkward about not remembering it.
If you've got more cash than any exemption can cover and no legitimate way to spend it down, sometimes the answer is that Chapter 7 isn't the tool. Chapter 13 lets you keep the money and pay its value through the plan. Sometimes the answer is to wait. Both beat guessing.
the bank statement is where the case is actually won or lost, and I mean the boring one, the month you filed. I read every line before the trustee does. A client came in convinced her refund was safe because she'd already gotten it. She'd used it to pay off her mother. That's a preference, and the trustee wrote to her mother. We'd have avoided it with one phone call in February. So when I ask what you did with the money, I'm not judging you. I'm looking for the one transaction that needs an explanation before someone else asks for it.
Questions people ask about this
Will the trustee take the money in my bank account when I file?
Only what isn't exempt. Under System 2 the wildcard covers most renters' balances entirely. Under System 1, 75% of recent wages plus a modest automatic amount and money necessary for support are protected, and the rest is exposed. Timing the filing for a low-balance day solves most of this.
Can I keep my tax refund if I file bankruptcy?
It depends on timing and system. The portion of a refund earned before the filing date belongs to the estate. Under System 2 the wildcard usually covers it. Under System 1 it's exposed, so we typically file after the refund has been received and spent on ordinary expenses.
Is it a problem to spend money before I file?
Not if it's ordinary spending: rent, food, utilities, insurance, car repairs, the attorney fee. Problems arise with gifts, paying back relatives, prepaying expenses far in advance, or buying luxury items. The trustee reads the statements, so every large transaction should have an ordinary explanation.
What happens if I paid back a family member before filing?
A payment to an insider within a year before filing can be recovered by the trustee from that person as a preference. Payments to ordinary creditors over $600 within 90 days can be recovered too. Tell us about any such payments so we can plan the filing date around them.
Are Social Security benefits protected?
Yes, under federal law, in either exemption system. Keep them in a separate account with nothing else deposited into it so the money is easy to trace. Mixing benefits with wages in one account makes the protection harder to prove.
Talk it through with the attorney
Before you file, and before you spend down an account or pay anyone back, send us the last two months of bank statements and Naomi will pick the filing date that protects the most on a free 30-minute video call.