When you are struggling with financial stress and bills that exceed your income, you might consider filing for bankruptcy. In the decision process, you might wonder if you should exhaust your savings before you file.
Understanding how your savings account applies to a bankruptcy filing can help you decide.
The role of savings accounts
Savings accounts provide an important safety net for unexpected emergencies, including job loss and medical emergencies. However, your savings account becomes an asset in a bankruptcy case.
The benefit of using your savings
When you use your savings to pay debts before filing for bankruptcy, it reduces the total amount that you owe. This might simplify your bankruptcy case. Reducing your debt balances might also allow you to retain some assets in the settlement. In addition, since your savings account might count as a resource in your eligibility calculation, paying down your debts with your savings before you file could increase your eligibility for a more favorable bankruptcy chapter.
The risk of using your savings
When you exhaust your savings to reduce your debts before bankruptcy, it leaves you without any financial safety net. You might have more trouble responding to a future emergency as a result.
In 2020, the Federal Reserve reported that 12% of American adults are unable to cover an unexpected $400 expense with cash on hand. Your savings account is an important part of that financial security, so it requires careful consideration before you use it to pay down your debts in advance of a bankruptcy filing.