Should You Spend That Extra Cash Before Seeking Bankruptcy?

In the last century, it was not uncommon to hear of average Americans, understandably wary of a then-fledgling banking industry, hiding personal fortunes under household mattresses instead of placing them in various accounts.  And yet while wads of cash are even less common in today’s tough economic times—times when banks coincidentally are mistrusted more than ever—the idea of Americans hording whatever they have for a “rainy day,” is not. Even as incomes continue to fall, personal saving is up, with many families throughout the nation’s now taking a measure of austerity as their personal mantra in throughout this recessionary era.

But what happens when possessing a large sum of cash or savings coincides with filing for a personal bankruptcy? While it may seem contradictory to think of those with money to burn considering themselves among the millions of Americans who need to seek the safe havens of bankruptcy every year, this scenario can be more common than you think. Whether it comes from an annual tax return, or a sudden inheritance, unexpected influxes of cash can be welcome, but not altogether helpful when your debt load is substantial and you see bankruptcy as your only financial hope.

One the one hand, if you are seeking personal bankruptcy protections, specifically a Chapter 7 liquidation bankruptcy, and you find yourself in possession of a large amount of cash, this windfall can be difficult to protect. Personal property that is “non-exempt” in a Chapter 7 bankruptcy can be seized and distributed to your creditors. This “unprotected” property does apply to cash with only a limited amount allowed as exempt.

As a result, in order to ensure a more successful bankruptcy filing, here’s what not to do with a stockpile of cash:

(1)    As a general rule, do not attempt to repay personal loans from family, friends, or business associates for more for the year prior to the filing of your bankruptcy petition.

(2)   As a general rule, do not transfer cash assets to some another person’s account without recording that fact in your bankruptcy petition.

(3)   As a general rule, do not give these funds as “gifts”  to family members or friends.

(4)   As a general rule, do not pay back commercial debts for the 90-day period prior to the filing of your bankruptcy petition

On the other hand, there are steps you can take prior to filing for bankruptcy to legally “reduce” (without concealing) cash assets:

(1)    Do use cash assets to pay your attorney fee and the bankruptcy case filing-fee.

(2)   Do open an IRA by depositing the maximum allowable amount.

(3)   Do catch up on arrearages in a mortgage or car loan in the months before filing.

(4)   Do pay for basic needs such as groceries, household supplies, and other non-”luxury” goods.

(5)   Do make home or car repairs as necessary.

(6)   Do prepay car or home insurance.

(7)   Do get necessary medical or dental care.

(8)   Do pay down student loan or income tax debts; or delinquent child support or alimony payments.

It can't be emphasized enough: You must see a bankruptcy attorney to properly determine how to best protect your assets prior to filing bankruptcy. Your money is too important to make a mistake. Contact an attorney immediately.
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