Filing for bankruptcy is not as simple as submitting a document, walking away from debts and starting over financially. Every move you make can affect how the court determines your bankruptcy case. Therefore, you need to ensure you take the right steps not only after you file but also before. One action you may be considering is using up all the money in your savings account either to pay off as much debt as possible before declaring bankruptcy or to protect it from creditors. Either way, you need to be aware of the following information before you deplete your savings.
Should you use all your savings to pay off debt?
This depends on your situation. If you are in serious debt that would still remain after years of trying to pay it off, then it may be better to file for bankruptcy now instead of later. Doing so can protect some of your assets and help you rebuilt credit sooner. Do not use retirement funds to pay off debt, either. Not only does this result in tax penalties for early withdrawal, but you also lose protection of that asset because creditors cannot touch it when you file for bankruptcy.
Another factor to consider is interest. The lower a balance is, the less interest there will be on it. If you have some money available you want to put toward debt, it may be smart to lower a balance with a high interest rate. You have to be very careful with your spending prior to bankruptcy, however, so the best course of action is to consult a bankruptcy attorney for advice specific to your circumstances.
What happens to your savings account when you file for bankruptcy?
If you do not use the money, then what happens to it? Some banks and credit unions may close or freeze your account upon your bankruptcy filing. The only way the financial institution can touch your savings is if you owe it money, such as through a car loan. The bank can use its set-off rights without notifying you. In this case, you should transfer your funds to a different bank before filing (which is a good idea anyway, as it can be difficult to open a new account once bankruptcy is on your record).
However, do not spend or cash out to avoid access to your money, because this is fraudulent activity. It may be possible to use an exemption to protect your savings. Talk with a lawyer for more information.