Find out if it's okay to take money out of your bank accounts before you file for bankruptcy.
It's not a good idea to empty an account and hide the funds to avoid paying creditors. Hiding assets from bankruptcy creditors, including hiding savings account funds, is a fraudulent act with stiff penalties. Fortunately, appropriate ways to protect savings accounts before filing for bankruptcy exist.
Learn what you can and can't do with a savings account before bankruptcy and other bankruptcy planning tips relating to checking and savings accounts.
- Keeping Property in Bankruptcy
- Avoiding Withdrawing Savings to Hide Money
- Protecting Savings Accounts With Bankruptcy Exemptions
- Using Savings for Living Expenses Before Bankruptcy
- Cashing Out Savings for Exemption Planning
- Determining Whether You're Bankrupt
- Protecting Against Account Freezes and Set Offs
Keeping Property in Bankruptcy
If you file for bankruptcy, you can keep or "exempt" the property allowed by your state's bankruptcy exemptions. Your creditors are entitled to the value of any remaining property, including any savings account funds not covered by a bankruptcy exemption.
If you can't protect your savings account balance in Chapter 7, the Chapter 7 trustee appointed to the case will seize the funds and distribute the money to creditors. Chapter 13 filers must pay an amount equal to the nonexempt funds to creditors through the Chapter 13 plan.
Avoiding Withdrawing Savings to Hide Money
Suppose you take money from your savings account and hide it from your creditors or the bankruptcy trustee. You'll likely be committing bankruptcy fraud.
Not only will the trustee be able to recover the funds, but you could lose your discharge—the order that erases qualifying debt—or face criminal prosecution and up to twenty years in prison, $250,000 in fines, or both. Instead, consider handling your savings account funds in a way that won't get you into trouble with the bankruptcy court.
Protecting Savings Accounts With Bankruptcy Exemptions
The most straightforward option is to exempt the money in your savings account. If you can protect the funds with a bankruptcy exemption, you won't lose them—they'll be safe from creditors.
The problem with this approach is that most states don't offer a bankruptcy exemption that protects cash or funds in an account, and when a state does, it usually won't cover much—perhaps $500 or less.
However, your state might have a "wildcard" exemption you can use to cover any asset you choose. The federal bankruptcy exemptions include a substantial wildcard exemption, so consider checking whether your state allows filers to use the federal system instead of the state exemptions.
Using Savings for Living Expenses Before Bankruptcy
Bankruptcy laws don't prohibit you from using your savings for items you and your family need. You have every right to use your money to purchase or pay for everyday items and services, such as rent, utilities, food, seasonal clothing, medical care, vehicle repairs, necessary appliances, and more.
The best approach is to keep track of your spending and be prepared for the bankruptcy trustee to ask you to justify your savings usage. Remember that extravagant spending could be questioned, and you might be unable to cover an expensive item with a bankruptcy exemption.
Also, pay only household bills that are currently due, not multiple months of rent in advance. It would also be useless to pay debts you'd erase in bankruptcy. The trustee would likely be able to recover any of those payments using the clawback provision.
Cashing Out Savings for Exemption Planning
Prebankruptcy exemption planning involves converting nonexempt assets, such as savings, into exempt assets before filing for bankruptcy. It's a touchy subject because courts aren't clear about how much planning is acceptable and when it crosses the line into defrauding creditors. Consult a bankruptcy lawyer before using this strategy.
Determining Whether You're Bankrupt
It isn't always possible to eliminate debt in bankruptcy while preserving all the assets we'd like. You might not be bankrupt if you have more savings than you can protect with bankruptcy exemptions and can't legitimately use the remaining amount to pay living expenses.
A simple way to determine whether you'd benefit from Chapter 7 bankruptcy is by subtracting the amount of savings (and the value of any other property you'd lose) from the amount of debt you'd discharge. If the amount of debt discharged will be substantially more than the property lost, Chapter 7 will be beneficial. If not, consider using your savings to pay debt instead. It will have the added benefit of preserving your credit score.
Because Chapter 13 offers various benefits, such as the ability to save a home from foreclosure, the analysis is more complicated. A bankruptcy lawyer will be best positioned to determine whether filing for bankruptcy will meet your needs.
Protecting Against Account Freezes and Set Offs
Filing for bankruptcy doesn't automatically freeze bank accounts. However, certain banks and credit unions will freeze accounts to protect the assets when notified of a bankruptcy filing.
The bank will require the bankruptcy trustee to call and verify that the account shouldn't be frozen—and the trustee will typically do so if the money in the account is exempt and you're entitled to it. The simplest way to prevent this problem is to limit the funds in the account before filing for bankruptcy when possible.
Also, if you owe money to your bank or credit union—perhaps for a credit card balance or car loan—the bank can withdraw account funds and pay the debt using a set-off mechanism. The contract you signed when obtaining credit gives the bank this right.
If you're concerned about a set off, switching banks before filing for bankruptcy might be a good idea. Just be sure to report both accounts in your bankruptcy case.
To learn more, see How to Protect Your Bank Accounts in Bankruptcy.
