Will I Lose My Checking or Savings Account if I File Bankruptcy?

Learn what happens to your checking and savings accounts if you file for bankruptcy.

By , Attorney · University of the Pacific McGeorge School of Law

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:

  • You must protect bank balances with a bankruptcy exemption to keep the money.
  • If you have different account types with the same bank and you've fallen behind on a credit card or loan payment, the bank could pay the debt with the money in your checking or savings.
  • Many banks won't open a checking or savings account for recent bankruptcy filers.

    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.

    If You Go Bankrupt, What Happens to Your Bank Account?

    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:

    • Ensure your checking or savings account isn't overdrawn and is in good standing before filing.
    • Protect account funds with a bankruptcy exemption. The trustee appointed to your case will look at the balance only and won't deduct for recently written checks or pending purchases.
    • Don't maintain a significant balance in a checking or savings account with a bank that issued you a credit card or loan if you're behind on the payment.
    • Don't keep much money in a bank with an institution that regularly freezes accounts after receiving notice of a bankruptcy filing. Your bankruptcy lawyer will likely be able to give you this information.

    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.

    How to Protect Your Checking or Savings Account in Bankruptcy

    Most of these problems can be avoided by understanding how they happen and avoiding common mistakes, which we explain below.

    Losing Money in a Checking or Savings Account Due to a Bankruptcy Setoff

    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.

    Losing a Checking or Savings Account Balance You Can't Protect With a Bankruptcy Exemption

    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.

    • Child support and alimony. Many states provide exemptions for child and spousal support.
    • Crime victim compensation. Most states exempt money the government gives crime victims.
    • Public benefits. Most states allow you to keep at least a portion of public benefits in a bank account, such as Social Security, disability payments, and unemployment benefits.
    • Wages. Most states exempt a portion of your recent wages. Ask your attorney whether you can claim recently deposited funds are protected wages.
    • Wrongful death and personal injury recovery. Money received due to wrongful death or personal injury might be exempt.
    • Other. Another exemption might exist. Read through your state's exemptions carefully.

    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.

    Other Things to Know About Checking and Savings Accounts in Bankruptcy

    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.

    Checking and Savings Account Planning Tips

    This list will help ensure you don't lose funds from your checking or savings accounts when filing for bankruptcy.

    • Have a bank account in good standing before filing for bankruptcy.
    • Open an account somewhere else if you owe money to your current bank.
    • Keep exempt money in a separate account.
    • Use nonexempt funds for needed items, such as bills, car repairs, and clothing. Keep good records, and don't pay months in advance.
    • Make sure charges have cleared your account and your balance is minimal at least a day before filing for bankruptcy.

    Navigating Your Bankruptcy Case

    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 A/B: Property

    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

    Bankruptcy Document Checklist

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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.

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