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I want to take a few minutes and talk about how money is handled in bankruptcy. Because
in bankruptcy I often say that a person has two kinds of money; there is the exact money
that is money that you receive from your paycheck.
Social Security, disability benefits, unemployment compensation, all of those monies are exempt.
Non-exempt money is basically everything else. Inheritance tax refund money that you borrowed.
All of those are non-exempt. If you file bankruptcy on a day when you have non-exempt money the
trustee is going to take it. And it's going to be gone. And we often have people who come
in and they may have we had one case recently where someone had $30,000 in a CD that was
money left over from an inheritance which they were saving for their son's college education.
So if they're going to file bankruptcy that non-exempt money has to be gone on the day
of filing so how do we deal with that situation?
Well if you think of it this way that there are two buckets. This bucket is the exempt
money. And into this bucket flows your paycheck, Social Security, disability benefits, unemployment
compensation. All of those flow into the exempt bucket. And over here in the non-exempt bucket
is this $30,000 of inheritance money.
Now the way that we deal with this is really quite simple. In our exempt bucket typically
That's where our paycheck goes and out of it flows all of our expenses: mortgage, rent,
car payment, utilities, groceries etcetera.
What we then do is change the place where the money comes from that we've used to pay
bills. We turn off the spigot on the exempt account and we now open up the spigot of the
non-exempt account and we now pay the mortgage payment, the car payment, groceries, utilities
and everything out of the non-exempt account and we continue to do that until that account
drains down to zero.
Now while that account was draining down over here in the exempt account, the same amount
of money that is not being spent on all of those monthly expenses is accumulating. So
ultimately we reach the point where the non-exempt account had been spent down to zero. And the
exempt account had filled up to $30,000. So the client on the day of filing still has
$30,000 but now they have $30,000 of exempt money and they have no money that's not exempt.
So they continue to preserve the $30,000 so they come out of the bankruptcy with $30,000
it's just in a different account.
Keep in mind that what I did here is a very simplified version of how to deal with money
in bankruptcy. As we often say in bankruptcy if there's ever a place where the phrase the
devil is in the details is applicable it's in bankruptcy. So get professional advice
on how you should deal with non-exempt money that you may have.