If you’re planning to file for Chapter 7 bankruptcy, you have good reason to be concerned about the money in your bank account. While Chapter 7 cases usually proceed without any problems, unexpectedly losing bank account funds is a common cause of needless grief. Avoiding banking-related problems in Chapter 7 is simple once you’re familiar with the following key issues:
• Can you exempt (protect) your entire bank account balance?
• Do you owe money to the bank or credit union for a credit card or loan?
• Are you prepared for the bank or credit union to freeze your account?
• Do you realize that some institutions will not open an account for you after you’ve filed a bankruptcy case?
Keep in mind that while pre-bankruptcy planning can help, the best way to avoid unexpected issues is to consult with a knowledgeable bankruptcy lawyer before filing your Chapter 7 case. Fortunately, you don’t lose everything when you file for bankruptcy and can keep all assets covered by your state’s bankruptcy exemption laws. Most states don’t offer much protection when it comes to cash and bank accounts, however the average exemption being around $300 if that. An alternative is using a wildcard exemption, which allows you to protect any property of your choosing. But again, not all states offer a wildcard exemption. If you can’t protect your bank account balance when you file your case, the Chapter 7 bankruptcy trustee appointed to administer your matter will take the funds to repay creditors. Most debtors realize that they need to exempt bank account funds and do so, but they often underestimate the amount they need to protect. They don’t realize that they must exempt the total account balance on the date of filing, irrespective of pending debit amounts not the balance that would remain after all pending checks and purchases cleared the account. The trustee might request that you bring a copy of your bank statement reflecting the balance on the day you file for bankruptcy with you to the 341 meeting of creditors the hearing most filers must attend. If the balance is higher than the amount exempted, you’ll need to turn over the difference. And no amount of explaining that your recently-made purchases hadn’t yet cleared will help.
How to avoid this problem
Make sure you have a minimal amount in your bank account on the day you file for Chapter 7 bankruptcy. Remember that you must exempt cash; too, so withdrawing it alone won’t be sufficient. Instead, use your money for necessary items something you’re always entitled to do such as food, needed clothing, utilities, rent, and essential car repairs. Also, keep your receipts so you can show how you used the funds, and again, spend the money before you file your bankruptcy case. Be especially cautious if you owe your bank or credit union any money before filing for Chapter 7. Banking institutions have the right to take money out of your bank account to “set off” (pay) the debts you owe them. The debt might be for past-due fees, or for a loan, mortgage, or credit card. So if you’ve fallen behind on your payment which happens to many debtors before filing for bankruptcy be aware that the bank or credit union might use a set off to remove funds from your account and apply the funds to pay down debt. While an unexpected set off is always painful, it’s even worse when it’s used to pay a debt that would be wiped out in your Chapter 7 cases.
Many banks and credit unions freeze the bank accounts of individuals filing for bankruptcy even when the debtor doesn’t owe the bank money. The banks’ position is that all of the debtor’s assets come under the control of the bankruptcy trustee immediately after filing for Chapter 7 until the debtor receives a debt discharge, and that freezing the accounts protects the funds for the trustee. Of course, it’s a hardship for debtors who are frozen out of the account without warning. But the solution is often simple. The debtor or the debtor’s attorney can contact the Chapter 7 trustee. If the funds are exempt, the trustee will usually instruct the bank to give the debtor access to the account, although it might take a few days. Otherwise, the debtor must file a motion with the court to have the funds released. Most banks won’t close an account that is in good standing just because of a bankruptcy filing. But you might not be able to open a bank account for sometime after filing for Chapter 7. Some debtors have reported problems doing so shortly after receiving a Chapter 7 discharge. If you owe money to your bank, open a new account elsewhere before you file for Chapter 7. You’ll have a better chance of emerging from bankruptcy with an active bank account. Just be sure to keep it in good standing thereafter.
Consult With a Bankruptcy Lawyer
No one wants to lose property in bankruptcy, but it can happen especially in Chapter 7. Chapter 7 debtors don’t have the right to dismiss the case when the trustee wants to take property without first getting permission from the court. So it’s essential to know how to protect bank accounts in bankruptcy and any other property before filing your action. Ultimately, the most prudent course of action is to consult with a knowledgeable bankruptcy lawyer.
Exemptions for Funds in Checking Accounts
Usually, there is no specific exemption to cover money in a checking account or other types of cash. A few states do provide a small cash exemption for a few hundred dollars. This does not mean that you cannot protect the money in the account, however, since it may fall within a different type of exemption. For example, a “wildcard exemption” may allow you to protect any type of personal property up to a certain amount in value. Sometimes the source of the money in the checking account may allow you to claim an exemption. If it comes from government benefits, such as Social Security benefits, or if it comes from a pension or retirement fund, child or spousal support, or a personal injury lawsuit, you may be able to claim a specific exemption for that type of cash. Many states also allow a debtor to claim an exemption for wages, although this may be limited to a certain amount. If the funds in the account were held in a tenancy by the entirety, this also may fall within an exemption in some states.
Non-Exempt Funds in Checking Accounts
On the other hand, if the money in a checking account does not qualify for any type of exemption, you will need to turn it over to the bankruptcy trustee. It will be used to repay creditors. Sometimes only part of the money in a checking account is exempt, while the rest must be submitted to the trustee. An individual filing for bankruptcy under Chapter 7 may face an account freeze by a bank. You can let the bankruptcy trustee know about the freeze and ask them to get the bank to release the freeze. The purpose of the freeze is to hold the assets in the checking account for creditors to collect on debts, so the freeze should be released if you can show that the funds are covered or partially covered by an exemption. You should try to make sure that any checks that you write from a checking account have cleared before you file for bankruptcy. This is because the bankruptcy trustee will check the balance in the account on the day of the filing. If some checks have not yet cleared, the balance may be higher than the amount that you stated to the trustee. This means that the surplus likely will be non-exempt and should be submitted for payment to creditors.
Avoid Losing Money or Access to Your Account
You likely already know that you can protect property with bankruptcy exemptions. This includes the money in your bank accounts. However, here are some common problems you’ll want to be aware of:
• Protecting the funds in your account. Most states don’t have a bank account exemption, and if one exists, the amount it’ll protect will be minimal. (Check out your state’s exemptions.) The bankruptcy trustee tasked with administering your case will look at your account balance on the filing date. You’ll lose any amount over and above the exemption amount, even if you have outstanding checks that haven’t yet cashed.
• Preparing for frozen funds. Some banks, to preserve the assets for creditors, will freeze your account as soon as they receive notice of your bankruptcy. If the funds are yours for instance, the money is post-filing income you or your attorney should contact the bankruptcy trustee. The trustee will instruct the bank to lift the freeze. In both cases, the avoiding the problem is simple ensure your balance is low by using your funds to pay necessary bills before you file. As long as you keep records, you shouldn’t run into an issue.
Avoid a Bank Set Off
Many people owe money to the institution where they have a checking, savings, or investment account. In such cases, when you signed the loan contract for the credit card or vehicle loan, you likely agreed to a set off a contract provision that allows the bank to withdraw funds from your deposit account and apply the money to your loan balance. An easy way to avoid this problem is to do your banking somewhere other than the bank you owe money to. (You’ll report all accounts when you fill out your bankruptcy paperwork, of course.). Like bank accounts, security deposits held by utilities, such as electric, telephone, or gas companies, can be subject to set off if you owe money to the utility company when you file for bankruptcy. If you file for bankruptcy, the utility company cannot demand payment of past due amounts to continue utility service. However, if you are behind in utility payments when you file for bankruptcy, the company can use money from your security deposit to cover the debt. And then it can require you to replenish your deposit or post a new deposit (some limitations exist). Before you file, be prepared to replenish your deposit in the case of set off. Consider timing your bankruptcy filing so that you aren’t behind in utility payments when you file.
Stop Automatic Payments Before Filing
Once creditors receive notice of your bankruptcy filing, they’re supposed to stop automatic or charges. However, if you’ve authorized automatic deductions taken from your bank account, paycheck, or credit card, it’s unlikely that they’ll stop the instant you file for bankruptcy. And sometimes when you request that automatic payments stop, it takes a while for that to happen. One way to make sure you aren’t short on the funds you’ll need to pay living expenses after filing for Chapter 7 or 13 bankruptcy, it’s wise to stop automatic payments well before you file.
This is particularly important if you have authorized a creditor to:
• debit your bank account for a debt that will be discharged
• collect money from your paycheck for a debt that will be discharged, or
• charge your credit card for ongoing services.
Notifying Creditors of the Bankruptcy
If you’re unable to stop payments before you file, you can speed up the process by notifying an important creditor yourself. Just fax or email a letter to the creditor with the bankruptcy case number, filing date, and the court where you filed especially if you need to stop:
• a pending or ongoing wage garnishment
• an imminent foreclosure sale
• a vehicle repossession, or
• any other matter that would be difficult to unwind.
You can probably keep your checking account in Chapter 7 bankruptcy if the funds are exempt and you don’t owe money to the bank. Most banks will let you keep a checking account open when you file for bankruptcy. However, whether you’ll be able to keep the funds in the checking account is a different question entirely. Whether you can keep the funds in your checking account when filing for Chapter 7 bankruptcy will depend on if you:
• can claim the money in the account as exempt (meaning the trustee cannot take it), and
• owe money to the bank holding your account (for example, you have a credit card with that bank).
Disclosing Your Checking Account Balance in Bankruptcy
When you file for bankruptcy, you must submit papers with the court that list everything you own (called the bankruptcy petition and schedules), including your bank account. If you don’t list it and the trustee finds out about it, will likely lose the money in the account even if you would have otherwise been allowed to keep all or part of it. Even worse, you could find yourself facing a bankruptcy fraud charge. Bankruptcy exemptions are laws that tell you which property you can exclude from your bankruptcy. If the property is exempt, you can keep it in a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you can keep nonexempt property (property that isn’t protected by an exemption), but you’ll have to pay an amount equal to the value of the nonexempt amount in your three- to five-year repayment plan. The exemptions available to you depend on where you live. Each state has a set of exemptions. Some states allow you to choose whether to use the state exemptions or the federal bankruptcy exemptions. Others only allow you to use state exemptions. Exemptions aren’t automatic. In your bankruptcy schedules, you’ll identify the property which you are claiming as exempt. Also, exemptions are available only to individuals. Businesses, such as corporations or partnerships, don’t get to claim exemptions. If you can claim the funds in your checking account as exempt, the Chapter 7 trustee assigned to your case won’t be able to use the money in your account to pay creditors. In Chapter 13 bankruptcy, you won’t have to pay creditors an equal amount through your three to five year plan. Most states don’t have an exemption for money in a checking account or even cash. And, for those states that do, the amount is often small, for instance, it’s common for a cash exemption to be as little as $300. However, you might be able to use another exemption to protect some of your funds.
Some common exemptions that might be available to you and that you might be able to use to protect money in your bank account include:
• cash on hand, up to a certain dollar amount
• any personal property, up to a certain dollar amount (this is usually a wildcard exemption—see below)
• wages (sometimes the amount is unlimited, and sometimes there is a cap)
• social security and other federal benefits
• pension or retirement funds
• child support or spousal support
• personal injury proceeds (check with an attorney)
• tenancy by the entireties property (in certain states), and
• wildcard exemption (allows you to choose any property to claim as exempt up to a certain dollar amount).
Bank Account Lawyer
When you need to have a bank account lawyer help you, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506