How to Protect Bank Accounts During Bankruptcy

Bankruptcy is an extremely difficult process for any individual or family to face.  However, today there are legal protections, both under federal and state laws, to preserve enough assets to allow debtors to meet the basic needs of their family.  However, those laws are very complex and require careful attention by someone filing for bankruptcy and their bankruptcy attorney.

Chapter 7 bankruptcy allows a debtor to discharge, or erase, a number of debts.  However, a bankruptcy trustee is also authorized to liquidate any unprotected assets to pay creditors before that discharge.  In addition, there are a number of types of property that are exempt from liquidation under state and federal laws.  Yet, even in light of those exemptions, there are times when a bank may be able to freeze or even confiscate the accounts of debtors filing for chapter 7.

Types of Exemptions

While federal property exemptions are standard throughout the country, many states have their own laws, which take precedence over federal statutes.  In a few states, the filer may choose whether to apply state or federal exemptions.  State exemptions vary widely, however, so that each filer should consult an attorney well before taking this important step.  In general, however, there are a few common categories of exemptions:

• Homestead or residential property
• Insurance
• Pensions
• Personal property (including automobiles in many cases)
• Public benefits which the filer receives
• Tools of the trade
• In some states, some amount of wages
• Wildcard Exemptions

Cash Accounts

For most debtors, the amount of cash that can be protected, or claimed as exempt, is limited to that which they are able to claim under any wildcard exemption.  The federal wild card exemption is $1,075, although debtors can also claim an additional $10, 125 from any unused portion of their homestead exemption.

However, it may be wise for debtors to plan well in advance of any bankruptcy petition to protect their bank accounts and cash.  There are several reasons for this:

• If the debtor has a loan or credit card from the same bank that holds their checking account, the bank may be able to claim any bank accounts as a "set-off" to recover their funds.
• As creditors learn of the impending bankruptcy, they may appeal to the bank to freeze the debtor’s accounts in hopes of claiming those resources

In response, a debtor may transfer as much of their cash as possible to a bank at which they do not have a loan or credit card.  While this may entail a bit of inconvenience, it may protect their cash from the bank’s right of set-off.

Transferring Property

In addition, there are actions a debtor may take before filing for bankruptcy to protect their cash by buying exempt property or making purchases secured by exempt property.  The rules governing these kinds of transactions vary by state, including how close to a bankruptcy filing those transactions can occur, so it is important to obtain competent legal advice before taking these steps.  In addition, all such transactions must be for full market value.  Fraudulent transfers are punished harshly under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Seek Legal Advice

It is more vital than ever for those filing bankruptcy today to consult a bankruptcy attorney before taking any action.  There are many laws to help protect property, which a consumer may be unable to discern.  In addition, there is little leeway in the bankruptcy laws today for those who abuse them.  To ensure full protection, consult an experienced bankruptcy lawyer well before beginning the bankruptcy process.