Will Chapter 7 Take My Savings?
Usually the answer is YES, but it’s best to call and check with a competent chapter 7 bankruptcy lawyer in Utah before you file. 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. 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.
Cashing Out Savings for Exemption Planning
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. 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. 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.
When to consider filing Chapter 7
If you’ve tried negotiating with your creditors, working with a credit counselor or consolidating your debt, but are still struggling to manage your debt, Chapter 7 bankruptcy might be your last resort. Chapter 7 bankruptcy can help by acting like a pause button for some of your debts. Once you file your petition, some of your creditors could be temporarily stopped from most collection actions against you or your property. But filing Chapter 7 can ultimately mean losing some assets. The law varies from state to state, and each state can classify property as exempt (can’t be taken) or nonexempt (can be taken). So depending on where you live, your home, stocks, other investments as well as other nonexempt assets you have could be at stake. If you’re concerned about what you may have to forfeit, talk to a lawyer. Some assets, including 401(k)s and pensions, may be exempt. The process of filing Chapter 7 bankruptcy generally takes 80 to 100 days from filing to when your debts are discharged. You’re not required to hire an attorney, but it is recommended that you go through this process with professional guidance from an attorney.
Here are some of the things you should be prepared to do during a Chapter 7 bankruptcy.
1. Complete bankruptcy counseling through an approved agency within 180 days before filing.
2. Pass a “means test.” The test is whether your income exceeds a certain amount. This requires you to show that you are eligible to file for Chapter 7 bankruptcy based on your state’s income standards.
3. File a petition with your local bankruptcy court. This will include paying court fees of up to several hundred dollars. You’ll also have to submit additional information, including information about your income and expenses. You’ll also need to provide your most recent tax returns.
4. Attend a creditor meeting (known as the Meeting of Creditors) with your bankruptcy trustee and any of your creditors who choose to appear. Your bankruptcy trustee will be assigned to you. You’ll be required to answer questions about your debt, property and financial situation under oath.
5. Complete a financial management course through an approved agency. You’ll need to complete the course and submit a form certifying you completed the course (Form 423) within 60 days of the first date set for the Meeting of Creditors.
6. Receive your discharge. This permanently stops creditors from collecting on any of the specific debts that were discharged in the bankruptcy. Remember, not all your debts are dischargeable in bankruptcy.
Drawbacks of Chapter 7 bankruptcy
Before you decide to file, there are several drawbacks of Chapter 7 bankruptcy to be aware of.
1. You may have liens placed against your property. A lien gives your lender a stake in your property. If the property is sold, the lender can be paid from the earnings.
2. You may lose property. Your property may be sold in order to pay creditors.
3. Your credit may be damaged. Derogatory public records, including bankruptcies and foreclosures, included in your credit reports have the potential to reflect poorly on your credit and can hurt your ability to qualify for new loans.
One of the major repercussions of filing for bankruptcy is the likely hit to your credit. How many points can you lose vary depending on your current scores and other factors relating to your financial situation. While the impact to your credit can decrease over time, your scores will probably take the biggest hit upfront. Chapter 7 bankruptcy stays on your credit reports for up to 10 years. Bankruptcy won’t necessarily prevent you from qualifying for new credit or even from being approved for a mortgage, but it can mean facing higher interest rates and fees. Remember that no matter what the impact, your credit can be improved with time and effort. By practicing healthy financial habits paying bills on time, keeping credit card balances low, and trying not to apply for multiple new loans or credit in a short period you can eventually rebuild your credit.
qualify for Chapter 7 bankruptcy
• Must pass the means test, which looks at your income, assets and expenses.
• Cannot have completed a Chapter 7 in the past eight years or a Chapter 13 bankruptcy within the past six years.
• Cannot have filed a bankruptcy petition (Chapter 7 or 13) in the previous 180 days that was dismissed because you failed to appear in court or comply with court orders, or you voluntarily dismissed your own filing because creditors sought court relief to recover property they had a lien on.
You can probably complete the process within six months. You’ll have to follow several steps.
• Credit counseling: You must complete pre-file bankruptcy counseling from a qualified nonprofit credit counseling agency within 180 days before filing.
• Find an attorney: Before diving into the various forms required to file Chapter 7, find a qualified bankruptcy attorney to help. It’s hard to find money for a lawyer when you need debt relief, but this is not a DIY situation. Missing or improperly completed paperwork can lead to your case being thrown out or not having some debts dismissed.
• File paperwork: Your attorney will help with filing your petition and other paperwork. But it’s on you to gather all relevant documentation of your assets, income and debts. An automatic stay goes into effect at this point, meaning that most creditors cannot sue you, garnish your wages or contact you for payment.
• Trustee takes over: Once your petition is filed, a court-appointed bankruptcy trustee will begin managing the process.
• Meeting of creditors: The trustee will arrange a meeting between you, your lawyer and your creditors. You’ll have to answer questions from the trustee and creditors about your bankruptcy forms and finances.
• Your eligibility is determined: After reviewing your paperwork, the trustee will confirm whether you’re eligible for Chapter 7.
• Nonexempt property handled: The trustee determines whether assets that aren’t exempt are worth selling so proceeds can go to creditors. Nonexempt property can be jewelry or the equity in your house or car if it’s higher than your state’s exemption limit. The majority of individual Chapter 7 cases, however, are “no asset” cases where there are no nonexempt items to liquidate.
• Secured debts: To resolve your secured debts, the property held as collateral may be ordered returned to the creditor. Or you may be able to redeem the collateral (you pay the creditor what it’s worth now) or reaffirm the debt (arrange to exclude the debt from bankruptcy and continue to pay it back).
• Education course: Before your case is discharged, you’ll have to take a financial education course from a qualified nonprofit credit counseling agency.
• Discharge: Three to six months after filing your petition, your case will be discharged, meaning that eligible debts are forgiven. Shortly thereafter your case will be closed.
Chapter 7 makes sense when:
• You don’t have many assets
• Your problem debts total more than 40% of your annual income
• Your problem debts can be discharged, or forgiven, by Chapter 7. These include debts such as medical bills, credit card debt and personal or payday loans.
• It would take five years or more to pay off your debt, even if you took extreme measures.
Some debts typically can’t be erased in bankruptcy, including recent taxes, child support and student loans. Bankruptcy still may be an option for you, though, if erasing other kinds of debt would free up enough money to pay the debts that can’t be erased. The other common form of consumer bankruptcy, Chapter 13, may be better if you have more assets or secured debts, and can repay some or all of what you owe. Other debt relief options are available, too, such as a debt management plan through a credit counseling agency. Take advantage of the free initial advice that credit counselors and many bankruptcy attorneys offer before deciding on a path.
Rebuilding after Bankruptcy
Your financial life particularly your credit will need some attention after bankruptcy, but having many debts resolved gives you a good starting point.
Take two steps to rebuild after bankruptcy:
• Make a financial plan: Build a budget, create financial goals, and consider enlisting the free help of a nonprofit credit counselor to help you along the way.
• Restore your credit: Make all payments on time, keep your credit balances low and dispute mistakes on your credit reports.
Filing Prior to Retirement
If you haven’t retired yet, the money in your retirement accounts such as a 401(k), 403(b), 457(b), Keogh, or other profit-sharing or defined benefit plan cannot be touched by creditors if you file for Chapter 7 bankruptcy, regardless of how much money you have saved in them. Chapter 7 is the most common form of bankruptcy and involves a court-appointed trustee liquidating your assets and distributing the money to your creditors. The money in those kinds of accounts also will not affect the amount you would have to pay back after filing for Chapter 13 bankruptcy, which is more complex than Chapter 7 and involves setting up a court-approved repayment plan. If you have funds saved in an IRA, Roth IRA, SEP-IRA, or SIMPLE IRA, the funds are also generally exempt from creditors, but only up to a certain limit.
Bankruptcy And Social Security Benefits
Under federal law, most creditors cannot garnish your Social Security benefits. However, the federal government does allow money to be taken from your Social Security check before it’s sent to you for the payment of federal taxes, federal debts including student loans, child support and alimony, and court-ordered restitution owed to the victim of a crime. Once the money hits your bank account, however, the money can be taken by creditors. The good news is that, under a rule established in 2011, banks must know whether federal benefits are included in an account before they allow money to be seized. If Social Security or similar government benefits are included in an account, the bank must protect two months’ worth of those benefits from creditors.
Chapter 7 And Discharging Debt
Under Chapter 7 bankruptcy, your medical bills can be discharged that is, completely wiped away. Credit card debt, personal loans, utility bills, attorney fees, and some court judgments can also be discharged. Mortgages, car loans, liens, and other tax bills, child support, and most student loan debts are generally non-dischargeable in a Chapter 7 bankruptcy.
How To Make the Decision To File Bankruptcy?
If you feel like you are drowning in unpaid medical bills or credit card interest and late fees, bankruptcy could offer some relief. However, some seniors may be considered judgment proof, which means that they simply do not have anything for creditors to collect if they sue and win. If you’re in that type of situation, a bankruptcy may be unnecessary. Consult an attorney about whether or not filing for bankruptcy makes sense for you.
Chapter 7 Lawyer
When you need legal help with filing for chapter 7 bankruptcy, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506