There are ways to spend cash before filing bankruptcy that are a good idea and ways that are a very bad idea.
Can I spend cash before filing bankruptcy?
If you are preparing to file for bankruptcy and a Chapter 7 bankruptcy in particular and you have a large amount of cash in your possession, protecting that cash can be problematic. Personal property that is “non-exempt” (non-protected) in a Chapter 7 bankruptcy can be seized by the Chapter 7 trustee assigned toyour bankruptcy case and distributed to your creditors. This applies to cash “property” as well, only a limited amount of which can be exempted, or protected. However, there are steps you can take prior to filing for bankruptcy to reduce cash assets in a legal manner if your Michigan bankruptcy attorney advises you that some portion of liquid funds in your possession may be open to seizure and liquidation by a Chapter 7 Trustee.
It is crucially important that you do not take steps to transfer or hide cash or any other property prior to filing bankruptcy before consulting an experienced bankruptcy attorney. Such transfers may be fraudulent under Michigan state law and under the Federal Bankruptcy Code and can result in a loss of your ability to obtain a discharge in bankruptcy and even criminal penalties.
Likewise, don’t assume that you must spend cash before filing for bankruptcy: the amount of property that can be protected from liquidation in a Chapter 7 bankrutpcy is highly relative to the amount that you have and the amount of other property that you own. Consult a bankruptcy attorney before doing anything.
Can I Spend Cash Before Filing Bankruptcy? What You Cannot Do …
First, what you cannot do with a stockpile of cash:
- Repay personal loans to family members, friends, or personal business associates if the repayment would bring the amount repaid to that creditor for that debt to $600 or more for the year prior to the filing of your bankruptcy petition
- Transfer the funds to someone else’s bank account without accounting for it on your own bankruptcy petition in that new “location”
- Gift the funds to family members or friends
- Repay commercial debts if the repayment would bring the amount repaid to that creditor for that debt to $600 or more for the 90-day period prior to the filing of your bankruptcy petition
What you can do to reduce cash balances on hand prior to filing for bankruptcy are some other, basic steps that do not involve making a “preferential payment” a creditor, hiding or concealing the asset, or fraudulently transferring the asset. Primarily, these steps are:
- Paying your attorney fee and the bankruptcy case filing-fee
- Opening an IRA and depositing the maximum allowable amount
- Catching up mortgage and car payments—and then waiting 90 days before filing your bankruptcy petition
- Buying groceries, household supplies, and other non-“luxury” needed goods
- Making needed automobile and home repairs
- Getting needed medical or dental care treatment
- Prepaying home or auto insurance
- Paying down student loan and income tax debt or delinquent child support or alimony payments
Or, finally, simply living off of the money, paying for groceries, rent, and other standard household expenses until the lump-sum total of the cash balance that you have on hand is low enough that your attorney can exempt it and protect it from liquidation by the Trustee. This is, of course, not an option for those who are in need of the protection of the bankrutpcy Automatic Stay from immediate lawsuits, garnishments, foreclosures, repossessions, or other collection actions. For others, however, a little patience may be in order.
Finally, a further option, if you need immediate relief and do not have the luxury of taking time to plan a Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be a better option for you if you have more property, cash or other types, than can be protected in a Chapter 7. A Chapter 13 bankruptcy is a “reorgnization” bankruptcy or a “payment plan” bankruptcy in which you repay some of what you owe to your creditors over 3-5 years under the protection of the US Bankruptcy Corut. It is not a “liquidation” bankruptcy as a Chapter 7 is. In a Chapter 13 bankruptcy, there is no liquidation of property at all, although the presence of non-exempt property can impact the necessary size of your monthly Chapter 13 plan payment.
If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.