by: Baran Bulkat, Attorney
You should never take money out of your savings account to hide it from your creditors in bankruptcy. However, under certain circumstances, it may be a good idea to spend or take money out of your savings account prior to filing your case. Read on to learn more about when it makes sense to take money out of your savings account before bankruptcy.
If you take money out of your savings account to hide it from the bankruptcy trustee or your creditors, you are committing bankruptcy fraud. Penalties for bankruptcy fraud can range from the loss of your discharge to criminal prosecution. As a result, you should never do this. However, there are times when taking money out of your savings account may be a good idea (discussed below).
Filing for bankruptcy does not automatically freeze your bank accounts on its own. However, certain banks and credit unions are known to freeze accounts if you file for bankruptcy. These banks will typically require proof that the money in the account is exempt in bankruptcy before allowing access to the funds again.
Also, if you owe money to your bank or credit union (for example if you have a balance on its credit card), it can freeze or even try to go after the money in your account. As a result, it may be a good idea to switch banks or take the funds out of your savings account if you know the bank will freeze your accounts or be a creditor in your case. But be aware that you still have to disclose the money in your bankruptcy even if you keep it as cash.
If you are filing for Chapter 7 bankruptcy, the trustee can take your nonexempt property and use it to pay your creditors. Bankruptcy exemptions protect your property in bankruptcy. If an asset is exempt, you can keep it. Each state (and the federal system) has a different set of bankruptcy exemptions. If you don’t want the trustee to take the money in your savings account, check your state’s exemption laws prior to filing your case to make sure you can exempt the funds. In most cases, you will have to use an exemption specifically designed for bank accounts or a wildcard exemption to protect your savings account.
If you can’t exempt your savings account, you may need to do some exemption planning before filing your case. In general, a certain amount of exemption planning is allowed as long as it is in good faith and not excessive. You can usually spend the money on necessities such as food or rent, or use it to buy an exempt asset. For example, if you don’t have a car but your state has a motor vehicle exemption, you may be able to use the money to purchase a vehicle.
However, keep in mind that excessive exemption planning can be construed as bankruptcy fraud (especially if it was not done in good faith). Each bankruptcy court has its own views regarding how much exemption planning is proper. As a result, consider talking to a knowledgeable bankruptcy attorney in your area prior to converting any nonexempt assets into exempt ones.
To learn more, see How to Protect Your Bank Accounts in Bankruptcy.