In a chapter 7 case the person filing is required to turn over to the trustee only the nonexempt money or property that he or she possessed at the time the case was filed. Many nonexempt assets are liquid in nature and tend to vary in size or amount from day to day. It is wise, therefore, to engage in some estate planning so as to minimize the value or amount of these liquid assets on the day and hour that the chapter 7 case is filed. The most common nonexempt liquid assets, and the assets that the trustee will be most likely to look for, include the following:
(2) bank accounts,
(3) prepaid rent,
(4) landlord and utility deposits,
(5) accrued earnings and benefits,
(6) tax refunds, and
(7) sporting goods.
It is usually advantageous to take steps to ensure that the value of each of these assets is as low as possible on the day and hour that the chapter 7 case is filed. By doing this the person will not be cheating or acting illegally; he or she will simply be using the law to his or her advantage, much the same as a person who takes advantage of the tax laws by selling property at the appropriate time.
Cash. If possible, the person filing should have no cash on hand when the chapter 7 case is filed. Further, if he or she has received cash or the equivalent of cash in the form of a paycheck or the closing of a bank account shortly before the filing of the case, the funds should be disposed of for valid purposes and receipts should be obtained when disposing of the funds in order to prove to the trustee and the court that the funds were validly disposed of prior to the filing of the case. Money possessed or obtained shortly before the filing of a chapter 7 case may be spent on such items as food and groceries, the chapter 7 filing fee, the attorney’s fee in the chapter 7 case, and the payment to creditors whose claims the person intends to reaffirm and continue paying after the filing of the chapter 7 case. Payments should not be made as gifts or loans to friends or relatives, however, as the trustee may later recover these payments.
Bank Accounts. The best practice is to close out all bank accounts before filing a chapter 7 case. If a bank account is not closed, the balance of the account should be as close to zero as the bank will allow and all outstanding checks must clear the account before the case is filed. If the person filing has written a check to someone for, say, $50 and if the check has not cleared the account 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 a person’s rent is paid on the first day of the month and if the person’s chapter 7 case is filed 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 will later have to be paid to the trustee. If possible, the person should make arrangements with the landlord to pay rent only through the date that the case is to be filed and to pay the balance of the rent from funds acquired after the case is filed. If this is not possible, the case should be filed near the end of the rent period.
Landlord and Utility Deposits. Unless they are exempt, the person filing should attempt to obtain the refund of all landlord and utility deposits before filing a chapter 7 case. Otherwise, the deposits, or their cash equivalents, will have to be paid to the trustee, unless the deposits are exempt.
Accrued Earnings and Benefits. In most states, and under the federal law, only a certain percentage (usually 75% or thirty-five times the federal minimum hourly wage, whichever is larger) of a person’s earnings are exempt. Therefore, the trustee may be allowed to take the nonexempt portion (usually 25%) of any accrued and unpaid wages, salary, commissions, vacation pay, sick leave pay, and other accrued and nonexempt employee benefits. Normally, then, the best time to file a chapter 7 case 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 annual leave or vacation pay is convertible to cash, it should be collected before the chapter 7 case is filed, as should any other nonexempt employee benefits that are convertible to cash.
Tax Refunds. In most states, a tax refund is not exempt and becomes the property of the trustee if it has not been received by the person prior to the filing of a chapter 7 case. Therefore, if a tax refund is expected, a chapter 7 case should not be filed until after the refund has been received and validly disposed of. Even if the case is filed before the end of the tax year, if the person filing later receives a refund, the trustee may be entitled to the portion of the refund earned prior to the filing of the case. The best practice, then, is to either file the chapter 7 case early in the tax year (but after the refund from the previous year has been received) or make arrangements to ensure that there will be no tax refund for that year.
Sporting Goods. If the person filing owns guns, fishing gear, skis, cameras, or similar items of value that are not exempt, he or she will later have to turn them, or their cash equivalent, over to the trustee. Such items should be disposed of prior to the filing of the case, especially if they are of considerable value.