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.

Although banks often close overdrawn accounts after a bankruptcy filing, you probably won't lose an account in good standing. But planning ahead is essential. Many financial institutions won't open new bank accounts for some time after bankruptcy. And, even if you have an account in good standing, you could temporarily lose access or permanently lose the balance. Here's why:

  • Some banking institutions freeze accounts temporarily after bankruptcy.
  • The bank can use account funds to bring a defaulted loan current.
  • You must protect bank balances with an exemption to keep the funds in bankruptcy.

Once you understand bank accounts in bankruptcy, check out some of the other things you should know about bankruptcy. Also, consider taking our quick ten-question bankruptcy quiz. It can help you spot potential bankruptcy issues fast.

Losing Access to Checking and Savings Accounts After Bankruptcy

Be prepared for your bank to freeze your account after your bankruptcy. It doesn't always happen, and you won't necessarily lose money. But it can be inconvenient if the rent is due.

So why does this happen?

Some banks freeze accounts when they receive a bankruptcy notice to prevent releasing money that might belong to creditors. Most will lift the freeze once the bankruptcy trustee—the official responsible for your matter—gives them the green light. So if the bank freezes your account after you file for bankruptcy, contact the trustee.

Planning tip. Make sure your balance is low the day before filing for bankruptcy—or sooner.

Losing Checking or Savings Account Money 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 somewhere else. Here's why.

The problem comes from a clause contained 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.

Protecting Checking and Savings Account Balances With Bankruptcy Exemptions

All bankruptcy filers must take another step to protect bank balances—making sure 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 it in Chapter 7 or pay for the property in Chapter 13 (you lose money in both chapters).

All filers review exemptions to identify property a filer might lose in bankruptcy. And most learn that protecting bank account balances isn't always easy. Most states protect a minimal amount of money, if any.

Here's what you'll do.

When you check your state bankruptcy exemptions, look for an exemption protecting cash or a bank balance. If you don't find one, consider the money-related exemptions we've listed below. But don't get excited by the length of the list—most apply in unusual cases only. A wildcard exemption will probably be your best bet because many let you protect an asset of your choice (limitations can exist).

  • 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.
  • Wildcard. A wildcard exemption covers a specific amount of property. For instance, a $1,500 wildcard might cover $1,500 in your checking account. Not all states have wildcard exemptions. Other states' wildcards don't apply to money.
  • 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 to you that you haven't yet received. The money often loses protection once you get it or if you comingle 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. 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 an abundance of caution.

Planning tip. Making a mistake in bankruptcy can be costly. When in doubt, talk to a local bankruptcy lawyer. Find out some good questions to ask a bankruptcy attorney.

Navigating Your Bankruptcy Case

Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step. And keep in mind that it isn't as easy as it might seem. Most lawyers who do not regularly practice bankruptcy will not accept bankruptcy cases.

One way to keep track of your research is to use the bankruptcy forms as an outline. You'll find links to related bankruptcy forms and other exemption resources in the chart below. You can also look at the list of Chapter 7 and 13 bankruptcy forms to see where this topic fits in the bankruptcy scheme. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

Planning Tips

  • 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 currently needed items, such as bills, car repairs, and clothing. Keep good records and don't pay months in advance.
  • Make sure charges have cleared and your balance is minimal at least a day before filing for bankruptcy.

Bankruptcy Forms

Schedule A/B: Property
Schedule C: The Property You Claim as Exempt
Your Statement of Financial Affairs for Individuals Filing for Bankruptcy

Related Information

Can the trustee take life insurance funds?
Can I file for bankruptcy if I have a judgment against me?
How long before filing for bankruptcy are you supposed to stop using credit cards?

Need More Info?

We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

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 consulting with a local bankruptcy lawyer.

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