Can the Court Take My Savings in Bankruptcy?

Persons filing bankruptcy can lose all or part of their savings.

A federal judge can legally confiscate a debtor’s savings. Bankruptcy in the United States however, does not usually result in a debtor losing his savings unless he has a substantial amount in cash and investments, regardless of whether he pursues either a Chapter 7 or Chapter 13 filing. Since debtors only qualify for Chapter 7 or 13 bankruptcy when in truly desperate straits, they usually do not have sufficient savings to lose.

Chapter 13

Under Chapter 13 bankruptcy, a debtor can keep all of his savings and assets while eliminating his liabilities by reorganizing his debt through the federal court system. He will make a single monthly payment to a trustee of the court assigned to his case until he pays the remainder of his debts off, according to U.S. Courts. Since creditors can garnish or seize bank accounts in most states, filing Chapter 13 can actually protect a filer’s savings, because bankruptcy prohibits attachment as long as the filer makes his monthly payment to the trustee.

Chapter 7

Chapter 7 bankruptcy liquidates most of a debtor’s liabilities, except for tax debts, student loans, child support and alimony. It also separates him from most of his non-exempt assets, including investments, bank account balances and property other than a primary residence, according to U.S. Courts. A judge will decide on a case-by-case basis how much money a filer can keep in savings. While the federal judge presiding over the case can order the confiscation of all of the debtor’s savings, he typically will not do so, according to Debt Wipeout.

Planning

If debtors file or intend to file for Chapter 7 bankruptcy protection, they may want to shut down or withdraw most of their money from their bank accounts. Debtors can then spend the money on essential items, since they may lose most or all of the money anyway. They should never remove money from their bank accounts and purchase luxury items with a value in excess of $1,000, or the judge may deny their bankruptcy appeal, according to the New Jersey Law Network.

Warning

Even if a court does not take a debtor's savings when she files Chapter 7 or Chapter 13 bankruptcy, her bank can legally freeze or drain her bank account if she owes a debt to the bank, such as credit card balances or a mortgage. In this situation, Gold and Hammes, California Attorneys at Law, recommend that debtors remove as much money as possible from their checking and savings accounts before filing. Debtors should also not write checks on their account in case their bank seizes or freezes their account, causing their outstanding checks to bounce.

References

• United States Courts: Chapter 7
• United States Courts: Chapter 13
• Gold and Hammes, Attorneys at Law: Chapter 13 Instructions After You File Your Case; 2011
• Debt Wipeout: Bankruptcy Q&A
• New Jersey Law Network; Answers to Frequently Asked Questions About Chapter 7 Bankrtupcy in New Jersey; John D. Kovac, Esquire; 2002