Security Deposits and Bankruptcy

July 26, 2017

What Happens to My Security Deposit If I File For Bankruptcy?

Large security deposits are common with apartments. When you leave your apartment, this security deposit money protects you from the landlord seeking damages. Many times the security deposit will be returned to you after the completion of your lease. What happens to your security deposit when you file for bankruptcy?

Your Security Deposit Could Become an Asset Taken in Your Bankruptcy

In Indiana, you may lose your security deposit for your apartment in Chapter 7 bankruptcy. However, usually this is not the case. To lose your security deposit, a few factors will likely need to be necessary in Indiana.

First, you will need to file for Chapter 7 bankruptcy. In Chapter 13, the bankruptcy trustee will not be interested in the security deposit as an asset because you are already paying back an amount to your creditors. Chapter 7, however, focuses on finding assets that can repay creditors.

Second, your security deposit will need to be very large in nature. Your bankruptcy trustee will not likely be interested in a $500 deposit. However, your trustee may very likely pursue a $2000 or greater deposit. The chances of your trustee pursuing such a deposit also increases if there are other assets being collected for creditors on your case.

Third, your security deposit will need to be collectable. If a contact or landlord situation proves too difficult to deal with legally, the trustee will likely abandon the security deposit because pursuing its collection may be cost prohibitive for the bankruptcy estate. Because there is a third party involved (the landlord), the trustee is sometimes dissuaded from entering such an undesirable situation.

Usually Security Deposits Are Not Taken in Bankruptcy

“Asset” cases in bankruptcy are much less common than what the court calls “non-asset” cases in Chapter 7 bankruptcy. This simply means that the trustees in bankruptcy usually do not seek any of your assets or moneys to be turned over during a Chapter 7 case. Unless your security deposit is very large and easily obtainable by your landlord, you will likely not have it taken during the bankruptcy. It is usually not worth the time or effort of the trustee to recover such a small amount for the repayment of creditors.

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