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Keeping the Money You Saved Before Filing for Bankruptcy

If you’re sure you’ll be giving up your house sooner or later, it makes excellent financial sense to keep living in it and give it up later. If you are current on your mortgage when you make this decision, you’ll be able to save at least three or four months worth of mortgage payments before foreclosure proceedings even begin. And depending on how long you have before the actual sale, you will probably be able to save several more months worth of mortgage payments. (More on this in Ch. 9.)

If you would like to file for Chapter 7 bankruptcy and delay the foreclosure sale even further, you should first figure out whether you’ll be able to keep what you’ve saved before you file, or whether you’ll have to give it up to be used by the trustee to pay down your unsecured debt. This issue doesn’t arise for any money you save after you file your Chapter 7 bankruptcy; it applies only to what you have in the piggy bank on the day you file.

You can keep your savings through the bankruptcy process if you can claim it as exempt. Every state has its own rules about how much money is exempt from creditors—in other words, how much you are allowed keep when you go through bankruptcy. And there is a separate set of federal exemption rules; in states that allow it, you may pick whichever system works best for you.

For example, in California, under the exemption system that just about everybody uses when there is no home equity to protect, you can protect roughly $22,000 worth of any type of property, including cash in a bank account. You can also keep such commonly owned items as household furnishings, motor vehicles, tools of the trade and personal effects. So, if you have $10,000 in the bank, you could keep that $10,000 and still have an additional $12,000 worth of protection for other property that isn’t already specifically exempted.

To find out how much money you are allowed to keep when filing for Chapter 7 bankruptcy, check your state’s page in the appendix.

It may be that the exemptions available to you in your state won’t let you keep the cash you’ve saved as well as all your other property. In that case, you’ll have to pick and choose what property you keep and what you give up. For example, if you have $50,000 worth of home equity, and your state makes you choose between the home equity and your savings account, you may have to give up the savings account. In the end, the only way to know for sure how much property (and cash in the bank) you can keep is to apply the exemptions that are available to you and see how it comes out. You can do this by looking up the exemptions for your state at www.legalconsumer.com.

EXAMPLE 1: Jon lives in California. He has no home equity. He has not been paying his $2,500 mortgage for seven months before he files for bankruptcy to stave off a scheduled foreclosure sale, and has put $2,000 a month in a bank account, giving him savings of $14,000. In addition to hand-me-down furniture and normal personal effects, Jon’s only other property is a classic 1967 Chevrolet Camaro Rally Sport, in perfect shape, easily worth $20,000.

 

In California, Jon is entitled to exempt $3,500 worth of motor vehicle equity and roughly $22,000 of any other type of property (the wild card exemption). Jon wants to hold on to his Camaro but will have to use $16,500 of the wild card exemption to supplement the $3,500 motor vehicle exemption to fully exempt it. That leaves him $5,500 from the wild card exemption. Because there is no specific exemption for a bank saving account (as there is for a motor vehicle, for example), Jon will be able to exempt only $5,500 of his savings. He’ll have to give up the rest ($8,500) as nonexempt property, to be used by the bankruptcy trustee to pay down his unsecured debt.

EXAMPLE 2: Amy lives in Massachusetts in a house she inherited. She has home equity of $200,000, but she doesn’t have enough income to borrow against her equity and she has a lot of credit card debts to deal with. Bankruptcy seems like the best way out. Amy checks www.legalconsumer.com and learns that the Massachusetts homestead exemption fully protects her equity. Unfortunately, the Massachusetts exemption system provides very little protection for savings, so if Amy has saved money before filing for bankruptcy, she’ll have to give it up.

 

If Amy had no home equity she needed to protect, she could use the federal exemptions (an alternative system to the Massachusetts state exemptions) to protect her savings, because they provide close to $11,000 protection for any type of property (including a bank account) for single filers and $22,000 for joint filers.