It's not a good idea to empty out an account for the sole purpose of ensuring that the funds won't go to creditors. Hiding assets from bankruptcy creditors is a fraudulent act that comes with stiff penalties, and this includes hiding the funds in a savings account.
However, under certain circumstances, it might be a good idea to spend or take money out of your savings account before filing your case. Read on to learn more about withdrawing money from a savings account before bankruptcy.
Get more bankruptcy planning tips.
When you file for bankruptcy, your creditors are entitled to receive a percentage of funds determined under bankruptcy law. For instance, priority creditors get paid first, while the majority of others take a pro rata share in any remaining amount.
If you take money out of your savings account to hide it from your creditors or the bankruptcy trustee—the official tasked with administering your case—you'll be committing bankruptcy fraud. Not only will the trustee be able to recover the funds using the clawback provision, 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.
If you are filing for Chapter 7 bankruptcy, the trustee can take your nonexempt property and use it to pay your creditors. In Chapter 13, you have to pay your creditors an amount equal to your nonexempt property—and likely more, depending on your disposable income and whether you have debt you must pay in full in your repayment plan.
Bankruptcy exemptions protect your property in bankruptcy. If an asset is exempt, you can keep it.
Each state decides the exemptions available for filers. If you don't want the trustee to take the money in your savings account, check your state's exemption laws before 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—and not many states allow filers to protect much cash—or a wildcard exemption that allows you to keep any property of your choosing to protect your savings account.
If you can't exempt your savings account, you might need to do some exemption planning when preparing to file your bankruptcy 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 a necessary exempt asset. For instance, 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 wasn't 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.
Filing for bankruptcy doesn't automatically freeze your bank accounts on its own. However, certain banks and credit unions will freeze accounts if you file for bankruptcy to protect the bankruptcy assets.
These banks will typically require proof that the money in the account is exempt (you can keep it) in bankruptcy before allowing access to the funds again. For instance, it's common for a bank to require the bankruptcy trustee to call and verify that the account shouldn't be frozen—and the trustee will typically do so if you're entitled to the money.
Also, if you owe money to your bank or credit union—for example, if you have a balance on its credit card—the bank can withdraw the money in your account using a mechanism called a set off. The contract you signed when obtaining credit gives the bank this right.
As a result, it might be a good idea to switch banks if you know the bank will freeze your accounts or be a creditor in your case. But be aware that you'll still have to disclose the money in your bankruptcy even if you keep it as cash, and you'll have to be able to exempt, as well.