Look Back

• The complicating factor about pre-bankruptcy planning is that the bankruptcy court has the power to look back at transactions that occur within 60 days to one year before you file for bankruptcy. The court has authority to unwind any transactions that appear intended to defraud creditors. Some bankruptcy district courts have local rules relating to pre-bankruptcy planning efforts involving the depletion of savings account balances. Accordingly, it is wise to consult with a local bankruptcy attorney if you want to attempt spending all your money before you file for bankruptcy.
  
  

Exemptions

• The temptation to spend the money in your savings account is strong when you realize that cash and savings accounts are typically not protected from liquidation in a Chapter 7 bankruptcy. State law determines specific exemptions but those vary from state to state. Some states allow exemption for cash or savings accounts, but most do not. If your cash or savings account is not exempt, the trustee can take it and distribute it to your creditors.
  
  

Purchase Exempt Property

• Taking money out of your savings account and using it to purchase nonexempt property is not a good idea because you can lose that property in bankruptcy. So, if you want to spend your savings before filing bankruptcy, familiarize yourself with applicable state law exemptions where you live so you can be sure your purchases will qualify as exempt property you will be able to keep.
  
  

Paying Off Debt

• For the same reasons, it doesn't make sense to use the money in your savings account to pay off debts that are likely to be discharged in bankruptcy. You are better off protecting that money by transforming it into some form of exempt property. You also don't want to use the money to pay down your secured debts on exempt property, like your car loans or your mortgage, because doing that might increase your equity to a level above the state law exemption level, which could result in that property then being sold by the trustee.