Personal bankruptcy is a legal process that allows individuals who have become overwhelmed with debt to get a fresh financial start. Depending on the type of bankruptcy filed, the nature and amount of your assets -- as well as your debts at the time of filing -- any cash assets you have, like a savings account, may be at risk in a bankruptcy process.
Chapter 7 and 13
Chapter 7 and Chapter 13 are the two most common forms of personal bankruptcy. In a Chapter 13 bankruptcy, you can keep most or all of your personal assets, including a savings account, provided you have enough income to enter into a repayment plan to pay most or all of your debts within three to five years. A Chapter 7 bankruptcy is a liquidation process. All assets, other than those that qualify for certain statutorily set exemptions, are taken by the bankruptcy trustee and liquidated to pay off creditors.
Read More: Can One Spouse File for Chapter 13 & the Other for Chapter 7?
Whether you can keep your savings account, or other cash assets, when you file Chapter 7 bankruptcy depends on whether that cash qualifies as exempt property. The exemptions available to Chapter 7 filers are a matter of state law and vary from state to state. Most states allow exemptions for a modestly priced car, small amount in home equity, trade tools, certain household items, and a wildcard exemption the debtor may choose to apply however he wishes, including protecting a savings account up to a specified dollar amount.
Source and Expenditure
The source of the funds in your savings account are an important factor in determining whether the account may be exempt from the bankruptcy estate. Funds from paychecks or loans may meet exemptions set by state law without requiring you to use your wildcard exemption to protect those funds. Another way to maximize the value of your savings account funds is to simply use them to pay necessary bills and living expenses prior to filing for bankruptcy. Paying relatives, making frivolous purchases or transferring assets to someone else are transactions the bankruptcy trustee may deem inappropriate or fraudulent, but paying necessary bills and living expenses can help improve your position in the bankruptcy process.
Bank Freeze on Account
Some banks place an administrative freeze on bank accounts when a Chapter 7 bankruptcy is filed. One federal circuit court of appeals has determined that freezing the account of a customer in Chapter 7 bankruptcy violates bankruptcy laws. However, courts in other areas of the country have yet to rule on this practice. Inquiring about the practices of your bank before filing bankruptcy will allow you to consider any options available to help avoid having the account frozen.
- Ware Law Office LLC: Considering Bankruptcy? Twelve Mistakes to Avoid
- Goldstein Law Group: What Happens to my Checking/Savings Account When I File Chapter 7 Bankruptcy?
- U.S.Courts: Liquidation Under the Bankruptcy Code
- Jacoby and Meyers: Chapter 7 vs. Chapter 13 Bankruptcy
- Cornell Law School Legal Information Institute: 11 USC Section 522 Exemptions
A freelance writer since 1978 and attorney since 1981, Cindy Hill has won awards for articles on organic agriculture and wild foods, and has published widely in the areas of law, public policy, local foods and gardening. She holds a B.A. in political science from State University of New York and a Master of Environmental Law and a J.D. from Vermont Law School.