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

Filing for Chapter 7 or Chapter 13 bankruptcy won’t cost you your checking or savings account as long as it’s in good standing and not overdrawn, but the money inside it is a different story. A bank “setoff” lets your own bank keep some of that money to cover a debt you owe it, and a missed bankruptcy exemption—the state or federal law that shields a set amount of property from your creditors—can cost you the rest. Read on to learn how to protect your balance, what happens if you share an account with someone else, and the mistakes that cost filers their cash.

What Happens to Your Bank Account in Most Bankruptcy Cases

In most cases, nothing happens to your bank account when you file. You keep the account and keep banking as usual. Getting that result depends on a few things going right, so take these steps before you file:

• 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 on the filing date and won’t deduct for recently written checks or pending purchases.
• To prevent a balance freeze upon filing, 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.

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.

Here’s a quick side-by-side look at how the two most common bankruptcy chapters treat a bank account balance.

How to Protect Your Checking or Savings Account in Bankruptcy

You protect a checking or savings account balance the same way you protect any other property in bankruptcy, with an exemption. Filers who bank where they owe a debt face a second risk—a setoff—on top of the exemption issue. Here's how each works and how to avoid losing money to either one.

Losing Funds You Can't Protect With a Bankruptcy Exemption

You'll lose any bank balance that isn't covered by a bankruptcy exemption, regardless of whether you file for Chapter 7 or Chapter 13. Exemption laws protect property from creditors before and during bankruptcy, but most states protect a minimal amount of cash, if any. (11 U.S.C. § 522.)

What Can You Protect?

Check your state bankruptcy exemptions for an exemption protecting cash or a bank balance. If your state doesn’t provide one, a wildcard exemption is probably your best bet, since many let you use it toward any asset of your choice. Limitations exist, though, because some states don’t extend wildcard protection to cash or bank balances.

Unusual Exemptions to Consider

Consider the money-related exemptions below if you don’t find a specific bank account or wildcard exemption. Don’t get excited by the list's length, though—most apply in unusual cases only.

To use these exemptions, the money must be in a separate account and not commingled with other funds. Once commingled, it's virtually impossible to prove the specific funds are exempt.

• Child support and alimony. Many states exempt child and spousal support.
• Crime victim compensation. Most states exempt money the government gives crime victims.
• Social Security benefits. Social Security funds in your bank account are protected by federal law, not just state exemptions—42 U.S.C. § 407 shields these benefits from garnishment, levy, and "any bankruptcy or insolvency law," regardless of which state you file in. (42 U.S.C. § 407.)
• Other public benefits. Most states also exempt at least a portion of other government benefits held in a bank account, such as unemployment compensation, workers' compensation, and disability payments, though the amount and scope vary by state.
• 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.

Another exemption might exist. Read through your state's exemptions carefully.

Exempt Account Planning Tips

To successfully protect funds in an account, there are a number of pitfalls you must avoid.

• Expect the trustee to ask for bank statements showing balances on the bankruptcy filing date. That's the amount you must protect. The trustee will not consider checks or debits that haven't cleared and would lower the balance.
• Keep exempt funds in a separate account. Money loses protection once it's commingled with nonexempt account funds because it becomes impossible to prove which funds are exempt and which aren't.
• If you have more money than you can exempt, use the nonexempt funds for necessary things like rent, utilities, car repairs, and clothing, so the money isn't in your account when you file your case. Keep records, and don’t pay months in advance. The trustee can use the "clawback" power to recover funds paid to creditors in a preferential manner.
• If your account is overdrawn when you file for bankruptcy, the institution will likely close it. Some credit unions will close accounts that are in good standing. Because it can be difficult to open an account after bankruptcy, consider opening a new account at another institution before filing (you'll still need to report it in your bankruptcy paperwork).

Losing Money Due to a Bankruptcy Setoff

You can lose money to a setoff if you bank with an institution that also holds a debt you owe, such as a credit card, car loan, or line of credit. Ask yourself: “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 comes from a clause in the loan contract called a setoff. A setoff lets your bank keep money in your savings or checking account and apply it against a debt you owe the same institution, and bankruptcy counts as a default that can trigger this right. (11 U.S.C. § 553.)

Filing for bankruptcy doesn’t let the bank act right away, though. The automatic stay stops creditors—including your own bank—from completing a setoff the moment you file. (11 U.S.C. § 362(a)(7).)

In practice, many banks respond to a bankruptcy filing by placing an administrative freeze on the account while they ask the court for permission (called “relief from stay”) to apply the funds. That freeze can lock up your money for weeks even before the setoff is formally approved—which is exactly why it’s smart to avoid keeping a balance at a bank you owe money to in the first place.

Planning tip. Open an account with a bank you don’t owe money to and do your banking there. Just don’t close the old account because some trustees see a closure as a red flag. You can get an idea about how the trustee investigates assets by reviewing the questions you can expect the trustee to ask you.

What Happens to a Joint Bank Account in Bankruptcy?

A joint bank account counts as your asset in bankruptcy, and a trustee can claim your share of it unless you protect that share with an exemption. In many states, the law presumes that each person named on a joint account owns an equal share, so a trustee could treat your portion—often half the balance—as part of your bankruptcy estate. (11 U.S.C. § 541.)

You protect your share of a joint account the same way you'd protect a sole account; with a bank account, cash, or wildcard exemption. But you'll typically need to prove how much of the money is actually yours if you want to claim that a larger share, or even the entire balance, belongs to the co-owner.

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—say, 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, though some filers exempt the funds anyway, just to be safe.

Checking and Savings Account Planning Tips

Here's a quick recap of the steps that keep most filers from losing bank account funds in 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.

Next Steps in Your Bankruptcy Case

Most filers keep their bank account and their money by banking where they don't owe a debt, claiming every exemption available, and keeping their balance low and documented before filing. If you're unsure how your state's exemptions apply to your balance or a joint account, a bankruptcy lawyer can review your specific numbers before you file. Here are a few articles worth reading next.

• How Much Debt Do I Need to File for Bankruptcy?
• Can You File Bankruptcy on a Judgment?
• When to Stop Using Credit Cards Before Filing for Bankruptcy