We like to keep money in our savings account as a “rainy day fund.” What will happen to it when we file bankruptcy?

You’ll lose it.

On the day you file bankruptcy, the bankruptcy estate is created. This estate is comprised of everything you own on that day: equity in your home, furniture, 401k, and money in your bank account.

The bk trustee looks at your bankruptcy estate to see if you have any non-exempt (unprotected) assets that she can use to sell off and pay your creditors. Normally, we can exempt (or protect) your various assets under state laws. Some states even have wildcard exemptions that let you protect a certain amount (like $25,000) of anything, even a pile of cash sitting on your kitchen table.

However, Utah (and most states) don’t have a wildcard. If you have cash in your bank account on the date of filing, you will lose it. In a chapter 13, the bk trustee will ask you to pay that balance to your creditors over your 5 year plan. In a chapter 7, the bk trustee will demand that you turn over your bank account balances to pay your creditors.

Now remember, it’s only the balance on the day of filing. That means that if your payday is on a Friday, then we file the bankruptcy on a Thursday when your balances are too low to be enticing to a bk trustee.

More often than you’d think, I have clients who argue with me, saying that they like to keep a savings built up for emergencies. The trustee won’t care. She’ll take that savings when you file. You can always build up a new savings after we file the case. And as for emergencies, i would say that bankruptcy is a pretty huge emergency.

So if you have a savings built up, I will recommend that you spend it on exempt items like food storage, clothing, and new tires for your car. It never hurts to use some of that to pay your bankruptcy attorney as well!