Good Reason to Delay Bankruptcy until Now: Accumulate Exempt Assets
Financial wisdom says you should set aside money for 3-to-6 months of living expenses. You can do so even before filing bankruptcy.
Bankruptcy’s Fresh Financial Start
The point of bankruptcy is to relieve you of crushing debt that saps your motivation. The idea is that once those debts are discharged (legally written off) or handled in a reasonable way, you will have fighting chance at getting ahead without being forced to rely on new debts.
The point of property exemptions is that you can’t really get a fresh financial start by starting over with absolutely nothing. If you have nothing—no vehicle, no roof over your head, no furniture, no reliable access to your full paycheck, no savings—most likely your fresh start will be dead on arrival. Property exemptions are a practical realization that in today’s economy to have a reasonable chance at climbing out of a financial hole you usually need a vehicle to commute to work, the ability to retain your paycheck, and other things, including some money set aside for the emergencies of life.
On this last point, using the rough estimate of a 3-to-6-months-of-living-expenses reserve, that means if your annual income is $50,000, the reserve would be $9,000 to $18,000. If you are currently considering filing bankruptcy, accumulating savings of that amount may well seem preposterous. But it’s not, necessarily.
Accumulation Exempt Assets is Often Paired with Depleting Non-Exempt Assets
Sure, it’s hard—or more like impossible—to accumulate a significant “rainy-day fund” when you’re living paycheck to paycheck, and even falling behind while doing so.
Often the only practical way to have the money to build such a fund is by getting money for your day-by-day living expenses from another source. If you can, a great way to do this before filing bankruptcy is to live off any unprotected, non-exempt assets so that you have the means to accumulate protected, exempt assets.
Our last blog post was about how to use up or otherwise dispense with non-exempt assets. Non-exempt assets are those that could be taken from you by a bankruptcy trustee to sell and pay the sale proceeds to your creditors. If you use up such unprotected assets for your reasonable living expenses before filing bankruptcy then they won’t be available to your creditors once you do file bankruptcy. Use up non-exempt assets by tapping a cash-convertible fund, selling them, or borrowing against them. That in turn gives you the opportunity to accumulate OTHER incoming assets to build up a living-expenses reserve.
Exempt Assets that Can Be Accumulated
Most state exemption laws allow you to accumulate certain income streams in a separate account, not mingled with any other type of income. Often a certain portion of your wage/salary income can be protected in this way, as well as certain kinds of annuities and such. Social Security and Veterans benefits can be accumulated without dollar limit under federal law.
Such pre-bankruptcy accumulations of assets should absolutely be done only with the right advice. That’s because these kinds of strategies are delicate and dangerous without the thorough guidance of a competent and careful bankruptcy lawyer.