Are you wondering what will happen to your bank account in Chapter 7 or Chapter 13 if you file for bankruptcy? You probably won't lose the account if it isn't overdrawn, but you could temporarily or permanently lose the money in the account. Here are a few other crucial things to know about how bankruptcy will affect your checking and savings:
Fortunately, you can avoid these problems, but planning is essential. If you'd like to spot other potential issues fast, try our quick ten-question bankruptcy quiz.
In the best-case scenario, nothing. But that's not all bankruptcy filers' experience. To avoid a problem with your bank account, consider doing the following:
Rushing out and closing your bank account is also a bad idea. Instead, review the suggestions below, and if you're worried you might run into a problem, speak with a bankruptcy lawyer.
Most of these problems can be avoided by understanding how they happen and avoiding common mistakes, which we explain below.
Here's an important question all potential bankruptcy filers should ask themselves: "Do I have a credit card, car loan, or line of credit where I bank?" If your answer is "Yes," you'll probably want to open a checking and savings account elsewhere, and here's why.
The problem arises because of a clause in the loan contract called a "setoff." A setoff lets your bank dip into your savings or checking account if you miss a payment or default on your loan, and bankruptcy is considered a default.
Planning tip. Open an account with a bank you don't owe money to and do your banking there. But remember, you probably won't want to close the account because some trustees would see the closure as a red flag. Take a look at the questions you can expect the trustee to ask you.
All bankruptcy filers must take another step to protect bank balances, ensuring that a bankruptcy exemption will protect the funds. Exemption laws protect property from creditors before and during bankruptcy. If an exemption protects your property, you'll keep it. Otherwise, you'll lose the money regardless of whether you file for Chapter 7 or 13.
You'll start by reviewing the exemptions that apply in your case. That's when you'll identify the property you might lose in bankruptcy. If you're like most, you'll find that protecting bank account balances in bankruptcy isn't easy. Why? Because most states protect a minimal amount of money if any.
Here's how to find out.
Check your state bankruptcy exemptions for an exemption protecting cash or a bank balance. If your state doesn't provide one, a wildcard exemption will probably be your best bet because many let you use it toward anything asset of your choice.
However, limitations exist because some states don't extend wildcard protection to cash or bank balances. Consider the money-related exemptions below if you don't find a specific bank account or a wildcard exemption. But don't get excited by the list's length because most apply in unusual cases only.
Important notes. Many exemptions cover amounts owed that you haven't yet received. The money often loses protection once you get it or commingle it with other account funds. Also, the trustee might ask for bank statements showing balances on the bankruptcy filing date, and the "check or debit hadn't cleared" excuse won't work.
Planning tips. Keep exempt funds in a separate account. Use nonexempt funds for necessary things like rent, utilities, car repairs, and clothing, so the money isn't in your account when you file your bankruptcy case. Keep records, and don't pay months in advance.
You'll report and exempt your open account balances in your bankruptcy paperwork and provide the trustee with bank statements. You can't avoid disclosure by closing an account—closed accounts get reported on another form.
If you're on an account you don't own—perhaps you invest funds for an elder or minor or oversee their financial needs—you won't list it as your property. You'll report it as property held for another, although some people exempt the funds in an abundance of caution.
This list will help ensure you don't lose funds from your checking or savings accounts when filing for bankruptcy.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
More Bankruptcy Information
Bankruptcy Forms and Document Checklist
Schedule C: The Property You Claim as Exempt
Your Statement of Financial Affairs for Individuals Filing for Bankruptcy
Chapter 7 and 13 Bankruptcy Form List
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.