Amanda Bynes -- Parents Say She's Paranoid and Hemorrhaging Money

The parents of Amanda Bynes believe she's a substance abuser who has become paranoid, delusional and is draining her bank account ... this according to legal docs obtained by TMZ.

Amanda's parents filed papers in an attempt to win a temporary conservatorship. In the docs, they say Amanda has become "extremely paranoid about being watched," and she covers smoke alarms with towels and tapes windows shut to prevent cameras from shooting her.

The parents go on -- Amanda has "profound issues with her body image" and is "obsessed with the fact that she (and others) are ugly."

The parents say Amanda had $4 million in the bank, but is blowing a huge amount of cash -- she spent $1.2 mil in a very short amount of time. Amanda withdrew $100k on June 4 and another $100k on July 2 and the parents have no idea where the money went, but they mention they believe she spends "a substantial amount" for marijuana and other illegal substances.

The parents say Amanda doesn't connect with reality, telling them she "cabbed it" from New York to L.A. The parents believe she's homeless.

The documents described what TMZ first reported ... that the parents are hanging their hats on the driveway fire incident to show Amanda is a danger to herself and others.

The court denied the petition for a temporary conservatorship Friday morning, because the judge wanted more info.