How to Cash a Check While Going Through Bankruptcy

Navigating financial matters during bankruptcy presents unique challenges, especially when receiving funds like a check. Bankruptcy filings introduce a complex legal framework that impacts how an individual’s assets and income are managed. Understanding these implications is important for cashing a check during this period. The process involves adherence to specific legal requirements to ensure compliance with bankruptcy law. This article explains the considerations for handling checks during bankruptcy, from determining a check’s legal status to cashing it and fulfilling reporting obligations.

Impact of Bankruptcy on Received Funds

Upon filing for bankruptcy, a legal entity known as the “bankruptcy estate” is created. This estate encompasses all of a debtor’s legal and equitable interests in property at the time the bankruptcy case commences. The purpose of the bankruptcy estate is to gather the debtor’s assets, which a bankruptcy trustee then manages to potentially pay creditors. Exemptions allow debtors to retain some property needed for a fresh start.

A key distinction in bankruptcy law is between pre-petition and post-petition assets or income. Pre-petition refers to anything owned or earned before the bankruptcy petition is filed. Post-petition refers to assets or income acquired after the filing date. Pre-petition assets become property of the bankruptcy estate, while post-petition assets are typically not included.

The treatment of funds differs significantly between Chapter 7 and Chapter 13 bankruptcy. In Chapter 7, the trustee’s primary role is to sell non-exempt assets from the estate to distribute proceeds to creditors. Income earned after the filing date in Chapter 7 usually belongs to the debtor and is not part of the estate. In Chapter 13, which involves a repayment plan, future income is used to fund the plan. Most tax refunds received during a Chapter 13 repayment plan are considered part of the estate and may go towards paying creditors.

Determining the Check’s Status

Classifying a check based on its timing relative to your bankruptcy filing is a fundamental step. A check is “pre-petition” if the right to receive the funds existed before the bankruptcy filing date, even if the check is physically received afterward. For instance, wages earned before filing but paid post-filing are pre-petition assets. Funds earned entirely after the bankruptcy filing are “post-petition.”

The type of check also dictates its treatment. Wages or salary earned before filing are part of the bankruptcy estate. Wages earned after the filing date are post-petition income, particularly in Chapter 7. Tax refunds become part of the bankruptcy estate if they are for income earned in a tax year completed before the bankruptcy filing. In Chapter 13, tax refunds received during the repayment plan are included in the estate, though courts may allow exceptions for necessary expenses.

Gifts and inheritances are subject to specific rules. Any inheritance or gift received within 180 days after filing for bankruptcy may become part of the bankruptcy estate. This applies even if physical receipt occurs after 180 days, provided the entitlement arose within that timeframe.

Lawsuit settlements or insurance payouts where the claim originated pre-petition but payment is received post-petition are also part of the estate. Social Security and disability benefits are exempt from the bankruptcy estate. It is advisable to keep these funds in a separate bank account to avoid commingling them with non-exempt funds, which could complicate their protected status.

Cashing Your Check

Once the legal status of your check has been determined, the practical steps for cashing it can be considered. The most common method is through your existing bank. However, some banks may freeze accounts upon learning of a bankruptcy filing, particularly if the balance exceeds a certain amount. While these freezes are often temporary and can be resolved, it is important to be aware of this possibility. Depositing the check into an account at a different bank or credit union, if you have one, might offer a smoother experience.

Check cashing services offer an alternative, especially if banking options are limited or accounts are frozen. These services typically require a government-issued identification, such as a driver’s license, state ID card, or passport. Some may also accept secondary forms of identification, like an employment ID or Social Security card, particularly if paired with a primary ID. Be aware that check cashing services usually charge a fee, which can range from a small percentage of the check amount to a flat fee.

Endorsing a check to a third party, such as a trusted family member, is another option. This involves writing “Pay to the order of [Name of Third Party]” on the back of the check, followed by your signature. The third party can then attempt to cash or deposit the check at their bank. However, if the funds from the check are considered part of your bankruptcy estate, endorsing it to a third party without the trustee’s knowledge and approval could lead to complications and potential legal issues. Any funds that are part of the estate must be managed by or with the consent of the bankruptcy trustee.

Reporting and Trustee Communication

A fundamental obligation throughout bankruptcy proceedings is the full and timely disclosure of all assets and income. This includes any checks received. Failure to disclose assets can lead to severe consequences, including the denial of your bankruptcy discharge. Intentional concealment of assets can result in criminal charges, such as perjury or bankruptcy fraud.

Upon receiving a check, especially if it represents an asset or income not explicitly listed in your initial bankruptcy paperwork, you must promptly inform your bankruptcy trustee. They will provide specific instructions on how to proceed. The trustee’s role is to oversee your case, ensure compliance with bankruptcy laws, and determine how funds should be handled, particularly if they are non-exempt.

It may be necessary to amend your bankruptcy schedules to reflect the newly received funds. The trustee will provide guidance on whether the funds need to be turned over to the estate, used for living expenses, or, in a Chapter 13 case, incorporated into your repayment plan. Always consult with your bankruptcy attorney to ensure proper disclosure and compliance with all legal requirements.