What Happens to My Bank Accounts During a Bankruptcy?

The Filing

It’s imperative that all of your accounts are disclosed when you file for bankruptcy.  Failure to do so is fraud and could subject you to legal prosecution.  Any account that earns more than $10 interest annually is reported to the IRS on a Form 1099-INT or equivalent statement.  So there is a paper trail to the government that cannot be avoided or ignored.

You are not prohibited from having bank accounts during bankruptcy proceedings.  If you don’t owe money to the same bank where your accounts reside, they will most likely not be affected.

Set-off

If you have a savings or checking account at the same bank that holds your mortgage or other loans, you will be subject to a claim by the bank for the owed money.  This is usually true even if you don’t declare bankruptcy.  Banks reserve the right to “set-off” accounts and use the positive balance in a savings or checking account to pay off your delinquent loans or lines of credit.  They don’t often exercise this right, but are apt to cut you off from any further credit.

In the event of a bankruptcy, the bank may freeze your accounts and set-off your accounts in order to recover part or all of the money you owe.  This may or may not happen but you should be prepared in case it does.  You don’t want to be in a position of bouncing checks while a bankruptcy is in process.  The best defense is to open an account before the filing with a bank where you have no outstanding loans or credit cards.  Transfer your balances from your current bank into the new account to avoid the set-off issue, leaving a small amount in your old accounts.

While you may be reluctant to jeopardize the relationship you have had with the same bank for many years, bankruptcy is very serious and requires objective planning to protect yourself to the maximum extent possible.

Basic Needs

While bankruptcy is a traumatic event for most people, it doesn’t mean you will be left completely destitute when it’s over.  The bankruptcy laws allow for the preservation of sufficient financial assets to meet the basic needs of the family.  Also, there are different types of property that are exempt from liquidation based on federal and state laws.

In a Chapter 13 bankruptcy, assets are not forfeited so your bank accounts will normally not be touched.  Your bank may try to place a freeze on your accounts, but this will likely be lifted by the judge at some point.  The intent of the Chapter 13 is to restructure your debt while preserving your means of repaying it over time.

Under a Chapter 7, the amount of money you will be allowed to keep will depend on a myriad of complex factors that will be determined by the judge under existing laws.  There are circumstances where a bank may be able to freeze or even confiscate accounts that are subject to the bankruptcy.  It’s critical that a bankruptcy attorney be involved in the process from the beginning to ensure that all protections available to you are implemented, and that as much cash as possible is exempted from the bankruptcy.

Options

Since you will be unable to use your old credit cards, those should be destroyed.  Once you have opened an account with a new bank, you can use a debit card issued against that account.  You may be able to protect cash by buying exempt property before the filing.  The timing and allow-ability of such purchases vary by state and they must be done at fair market value.  Also, be aware that when you establish a joint bank account, the cosigners accept “joint and several” liability, which carries through in the event of a bankruptcy.

Getting Legal Help

These are general guidelines, and you should consult an attorney for details about the laws that will govern bankruptcy in your particular case.