Cash is King: Can I still spend it going bankrupt?

Saturday , 21, September 2013 Leave a comment

You owe thousands of dollars to various creditors, including credit card companies and healthcare providers.  However, you have a decent stash of cash that cannot be protected via an exemption and you are afraid that the court will take your cash and distribute it to your creditors.  Sound familiar? We all want to hold onto our ex presidents!

Obviously, you would rather benefit from this cash reserve than have the trustee take it from you and get nothing in return.  The problem, however, is that generally you cannot make large purchases prior to filing your petition.  Any such payments will be considered to be a preferential payment, fraudulent conveyance and/or attempting to hide your assets from your creditors.  These large purchases can be rescinded by the trustee, forcing you to give back the goods or services purchased and your estate getting back the cash for the trustee to distribute to your existing creditors.  So how can you benefit from this cash reserve before the trustee gets to it and leaves you with nothing?

There are some loopholes that enable to benefit from the cash before the trustee can get to it.  Some things you can do with your cash, which will give you some benefits, are:

  • Setting up an Individual Retirement Account or IRA and depositing the maximum amount allowed by law (see discussion below);
  • Making prepayments on car or home insurance;
  • Bringing your auto and mortgage payments current–and then filing your bankruptcy petition after waiting 90 days;
  • Paying your bankruptcy case filing-fees and attorney fees;
  • Obtaining needed dental or medical treatment;
  • Paying for needed home and car repairs;
  • Catching up on delinquent child support or alimony payment;
  • Reducing income tax and student loans;
  • Purchasing household supplies, groceries and other non-“luxury” needed goods;
  • Fund a college savings plan N.J.S.A. NJBEST accounts protection – 11 USC 541(b)(5) of bankruptcy code protects college saving plan money if it has been in the plan for more two years.

Hopefully, by doing these things, your cash balance will be low enough to find an exemption for it and protect it from seizure by the trustee.  Some things that you cannot do with your cash are:

  • Give the money to friends or family members as gifts;
  • 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;
  • 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;
  • Fraudulently transferring the money to someone else’s bank account without accounting for it on your own bankruptcy petition.

In order to for your money to be protected when funding an IRA, there are several conditions that must be met.  First, you must have been making regular contributions to your retirement account prior to declaring bankruptcy.  This means you cannot put all your cash into your IRA right before bankruptcy and expect it to be protected.  IRA protection only extends insofar as you weren’t intentionally trying to hide money from debtors.

Secondly, your IRA assets cannot total more than one million dollars.  However, any amount that was rolled over from another account, like a 401(k), received unlimited protection.  Thus, you still receive the benefit of up to $1,000,000 in protection in your IRA account plus unlimited protection for rollover funds.

As with any aspect of Bankruptcy knowledge, just like your beloved cash, is KING. Lawyer up when deciding whether Bankruptcy is right for you. Your wallet and those that depend on it will thank you.

The New Jersey personal bankruptcy attorneys at Riviere Cresci & Singer LLC can answer any questions you may have.  If you live in New Jersey, including the towns of Keyport, Plainsboro, Howell, Jackson, Sea Girt, Edison, Ocean Township, or Barnegat, call us for a free consultation to find out how we can help you.

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