It is no uncommon for a renter to have a security deposit as an asset when filing for bankruptcy. Section 541 requires that a security deposit be listed in the filing because it is an asset that belongs to the debtor even though it is in the possession of someone else, ie. a landlord. The fact that the security deposit may be taken by the landlord at the end of the rental agreement does not exclude it from being an asset that must be listed.

Because Michigan allows a debtor to select the federal bankruptcy exemptions which include the "wildcard" exemption, a security deposit can be claimed as an exemption. If you have used up the exemption you should still be able to avoid repaying the amount of the security deposit because a trustee only acquires whatever rights the debtor had in the security deposit. In the case of security deposits, the debtors’ right is a potential future right to reclaim the deposit. If the trustee wants to claim the security deposit, the trustee will need to keep the estate open until the end of the rental agreement. Even then, the trustee can only recover what the landlord cannot legally keep to cover damage or outstanding payments. Given this fact, it is unlikely that a security deposit will significantly impact a bankruptcy filing.

- Richard V. Stokan, Jr.