When you file for Chapter 7 bankruptcy, you will create a bankruptcy estate that includes everything you own and everything you are entitled to receive as of the date of your filing. But just because you have filed for Chapter 7 bankruptcy does not mean that your income becomes property of the bankruptcy estate. You can still receive money after you file.
The answer to this question depends on multiple factors. These include:
- The source of the money
- When you become entitled to receive it
- What bankruptcy exemptions may apply
We will consider each of these factors in this blog post.
If you have received money after filing for Chapter 7 bankruptcy, call us at (480) 739-2448 or use our online contact form to speak with one of our experienced bankruptcy attorneys.
What is the Source of the Money?
Post-bankruptcy filing, you might receive money from a variety of sources. Examples include:
- Wage income
- Tax refunds
- Government checks
- Inheritances, life insurance payouts, and divorce settlement amounts
- Windfall amounts, like lawsuit judgment awards or lottery winnings
Your Chapter 7 bankruptcy filing can affect each of these sources of money differently. Here are some general rules.
Wage Income
Ordinarily, the income you receive after your bankruptcy petition filing date is yours. It does not become property of the bankruptcy estate. But if any new income you receive after your filing was earned before you filed, then the bankruptcy trustee can seek to include those funds as estate property.
If your income increase was expected before filing, it may raise questions about the accuracy of your bankruptcy filing. Trustees may review your case if your income increases significantly after filing to ensure there was no misrepresentation in your filing.
Failure to disclose an increase in income during Chapter 7 bankruptcy can result in severe legal consequences, including bankruptcy fraud charges. Therefore, debtors must report any increase in income to the court and creditors during Chapter 7 bankruptcy proceedings.
Tax Refunds
Tax refunds that are connected to income you earned before your bankruptcy filing may be subject to the trustee claiming them as part of the bankruptcy estate. But if your filing date falls in the middle of the tax year, the amount that might become part of the estate is subject to proration.
Government Checks
Examples of government checks you may receive include rebates, tax credits, or forms of government relief. Whether these become part of the bankruptcy estate depends on the specific facts surrounding the kind of funds you receive.
- Some may be treated like tax credits; if your eligibility to a government benefit existed before you filed, these may become part of the estate.
- Other funds may qualify as public benefits that you can usually keep outside of the estate property.
Inheritances, Life Insurance Payouts, and Divorce Settlements
These sources of money are subject to the “180-day rule.” Meaning, if you become entitled to receive them within 180 days of your bankruptcy filing, then they are included in the bankruptcy estate under 11 U.S.C. § 541(a)(5), subject to any available Arizona exemptions.
Windfall Amounts
If you receive an amount of money that was not connected to an earning activity, like a gift or winning money at the casino, then whether these funds become estate assets depends partly on when you received them. The general rule is that if you received these monies before you file bankruptcy, they become part of the estate. Any such funds you receive after you file are outside the estate.
This general rule is not necessarily ironclad. For example, if a family member sends you a large gift of money after you file, it may raise the trustee’s suspicions about the real intent of the funds transfer (whether it was intended to circumvent the bankruptcy case).
Whether judgment awards or settlement payouts from civil lawsuits in which you were a plaintiff become estate assets depends at least in part on when the incident that led to the lawsuit happened.
- If it occurred before your filing date, these monies may become part of the bankruptcy estate.
- If the incident happened after your filing date, the money is outside the estate.
Again, it does not matter when you file the lawsuit; the important date is when the underlying event that gave rise to your legal claim took place.
Also, sometimes part of your judgment award or settlement may be excluded from the estate, like economic damages you receive to cover medical expenses, while other funds can become part of the estate. Your bankruptcy lawyer can help you know which part you can count on keeping.
When Do You Become Entitled to Money?
As we have seen above, timing is an important factor in deciding whether the money you receive or become entitled to ends up in the bankruptcy estate. One key consideration is the “180-Day Rule.”
The essence of the 180-Day Rule is that if you become entitled to any of the following within 180 days after your bankruptcy filing, they will usually become part of the bankruptcy estate even if you have not yet received the funds:
- Inheritances
- Life insurance proceeds
- Divorce decree awards (property or cash, not spousal support payments)
If, however, you gain the right to these monies after more than 180 days have passed from your filing date, they do not become estate assets.
Monies that are excluded from the 180-Day Rule include:
- Wages you earn after filing bankruptcy
- Gifts that are not inheritances
- Lottery winnings or other windfall amounts, as long as you do not become entitled to them before filing
- Property you receive based on events that occur after the bankruptcy filing date
- Assets you become entitled to receive more than 180 days after the filing date
Examples of the 180-Day Rule
Here are some situations in which the 180-Day Rule may or may not apply:
- Inheritance: If a relative who leaves you an inheritance dies within 180 days after you file for Chapter 7 bankruptcy, the inheritance will be part of the bankruptcy estate; but if that person dies more than 180 days after your filing, you keep the inheritance.
- Divorce property settlement: If the divorce court awards you money or assets as part of a divorce settlement within 180 days of your bankruptcy filing date, the bankruptcy trustee may claim them for the bankruptcy estate; but if the final judgment from the divorce court comes more than 180 days after your bankruptcy filing, you can keep the settlement money and assets.
What Bankruptcy Exemptions Might Apply to Money?
Bankruptcy exemptions can protect money and property from becoming part of the bankruptcy estate, even if they would otherwise be included under the 180-Day Rule.
Arizona is what bankruptcy practice calls an “opt-out state.” What this means is that although in many states, federal bankruptcy code exemptions may apply to a Chapter 7 bankruptcy case, in Arizona, you must use the exemptions provided by state law.
Arizona Money-Related Bankruptcy Exemptions
Here are some of the bankruptcy exemptions under Arizona state law that may help you keep money and assets from becoming part of your bankruptcy estate.
The Homestead Exemption
Arizona Revised Statutes (ARS) Sections 33-1101 through 33-1105 cover homesteads and the homestead exemption. This exemption protects your equity in your primary residence, up to $400,000. Although the homestead exemption does not normally exempt cash, if the source of the money is a forced sale of your primary residence and you reinvest the proceeds of that sale within a certain period of time, the exemption will apply to the sale proceeds.
Personal Property Interest Exemptions
Under ARS 33-1125(8), you can exempt up to $16,000 of equity in one vehicle, or up to $26,700 if you or a dependent of yours has a physical disability. Equity in this context means the fair market value of the vehicle, minus any liens.
If you and your spouse are both filing for bankruptcy, the $16,000 exemption doubles to $32,000. This is $16,000 for you to protect your car and $16,000 to protect your spouse’s. If there is only one car between you and your spouse, then the amount is $32,000 for one car.
In addition to your personal vehicle, you can exercise money-related exemptions for the following:
- Household goods and furnishings are exempt up to the current amount provided in ARS 33‑1125, which is periodically adjusted for inflation.
- Life insurance proceeds payable to a surviving spouse or dependent child are generally exempt under ARS 33‑1126(A)(1). Cash surrender value may be exempt up to $25,000 under ARS 33‑1126(A)(6).
Wages Exemption
Post‑petition wages are excluded from the bankruptcy estate under 11 U.S.C. 541(a)(6). ARS 33‑1131 governs wage garnishment protections, which may still be relevant outside the bankruptcy estate context.
Retirement Account Exemption
Under Arizona and federal law, if you are receiving a qualified retirement plan distribution, such as a 401(k) or IRA, it may be exempt from the bankruptcy estate if it is traceable to an exempt account and has not been commingled with non-exempt funds.
Spendthrift Trust Exemption
Under ARS 14-10502 and 11 U.S.C. 541(c)(2), if you are the beneficiary of a valid spendthrift trust, then money held in the trust is excluded from the bankruptcy estate. But once the trust distributes any money to you, that distribution may be subject to becoming an estate asset unless an exemption applies to it.
What Should You Do if You Receive Money After Filing for Chapter 7 Bankruptcy?
Although the 180-Day Rule may seem simple on the surface, receiving money after filing for bankruptcy can present complex legal considerations that have a significant effect on whether you can keep it outside of the bankruptcy estate.
If you improperly withhold money from the bankruptcy estate, it could lead to negative consequences, including accusations of concealment by the bankruptcy trustee, the inability to receive a discharge in bankruptcy, or even dismissal of your case by the bankruptcy court.
Here are some pointers that can help you better understand how to handle funds you receive after your bankruptcy filing date:
- When you receive money, document in your financial records where it came from.
- Keep retirement funds you receive separate from other sources of money to avoid commingling problems.
- Consult with an experienced Arizona bankruptcy attorney for legal guidance on what funds you can keep outside the bankruptcy estate through the 180-Day Rule and applicable Arizona bankruptcy exemptions.
When you call Stone Rose Law at (480) 739-2448, you will be able to speak with an experienced bankruptcy attorney about any bankruptcy-related financial situation, including Chapter 7 bankruptcy, Chapter 13 bankruptcy, and how you can legally keep as much of your post-filing income as you can from being rolled into the bankruptcy estate.
Call us to set up a free consultation, or use our online contact form.
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