As a bankruptcy attorney, I don’t see many clients with extensive “cash reserves.” If I did, I would likely point them down an alternate path of financial recovery.
On the other hand, despite what many people think, deadbeats don’t file bankruptcy.
I have previously talked about the shifting demographic of the bankruptcy filer and can safely say that most of my clients do in fact have some cash and/or savings.
Even a small amount of cash can create problems when filing bankruptcy.
Non-exempt cash becomes part of the bankruptcy estate and the bankruptcy trustee can take your money and use it to pay back your creditors.
Cash is the “low hanging fruit” of the bankruptcy jungle. It is a “hanging curve ball” for the trustee to belt out of the park. Okay, end of metaphors.
It is important to know what to do with your cash prior to filing bankruptcy. It is equally important to know when and how to do it and this is where an experienced attorney earns his/her fee.
Harvest your Cash Before Filing Bankruptcy
The bankruptcy trustee is hungry and your cash is easy pickens.
If you are a homeowner and you have equity in your home, you must use the homestead exemption to protect the equity in your home.
The result of using the homestead exemption to protect your home is that you are not entitled to exempt whatever cash you may have.
Cash includes actual cash and any funds you may have in your financial accounts at the time of filing.
This cash needs to be harvested prior to filing so that when the case is actually filed, your cash balance is as close to $0 as possible.
While this may sound like fraudulent concealment of an asset, it is not.
Pre-filing planning is an integral part of the bankruptcy process and again, this is where an attorney is invaluable.
There are certain expenses that can and should be paid prior to filing bankruptcy to dispose of excess cash and these include:
- Monthly mortgage payment;
- Mortgage arrears;
- Attorney fee;
- Utility bills;
- Car payment.
This list is not exhaustive and there can be other “legitimate” uses of cash prior to filing. The important thing is to use it and not lose it.
Know When to Fold ‘Em
Almost every time I attend a 341 Meeting of Creditors I see a pro se debtor who decided to save some money and file bankruptcy without an attorney.
I can count on one hand the number of pro se cases that I have seen go through without a hitch.
Recently, I witnessed a debtor who failed to cash out prior to filing his petition and he paid the price.
Debtor owned a home with equity and as a result, took the homestead exemption. His petition was in order, all exemptions were applied and all the correct documents were sent to the court and the trustee.
This particular trustee requires that you bring bank statements with you to the Meeting of Creditors evidencing your account balances on the date of filing.
This pro se debtor who actually seemed quite competent had approximately $4,000.00 in his account at the time he filed. He testified that this money had already been withdrawn by his mortgage bank after the date of filing.
This is a phantom mortgage payment and the cash in the account at the time of filing is property of the bankruptcy estate. The trustee demanded turnover of that cash.
If this gentlemen had hired an attorney, he would have been advised to simply delay the filing until the payment cleared. Yes, he would have paid an attorney fee but I am not aware of any attorney charging $4,000.00 for a chapter 7 fee.
If you are filing bankruptcy, with an attorney or not, it is extremely important to be conscious of your cash prior to filing.
Harvest your own cash and enjoy the bounty of your fresh start.
Image courtesy of caza_No_7 (Flickr).