People often ask stressful questions like “can I keep my bank account if I go bankrupt?” and, “can you have money in the bank and file bankruptcy?” While it doesn’t happen very often, your bank may freeze your bank account during bankruptcy, and this experience can be both inconvenient and upsetting.
Fortunately, with a little planning, you can avoid a bank account freeze or take steps to minimize the damage and maintain access to your bank account funds.
There are two primary reasons that a bank might freeze a checking, savings, or other account. The first is that the bank is attempting to protect your money, which is under the jurisdiction of the bankruptcy court and which may be subject to an exemption that helps it remain your money. The second is that the bank is trying to protect its own right to offset your money against any debt you owe the bank.
The Houston bankruptcy lawyers at the Law Offices of Seth Kretzer cover more about these circumstances below.
Bank Account During Bankruptcy
As we have discussed in other articles, you can protect various types of property with the State of Texas or federal bankruptcy exemptions. This includes the money in your bank accounts, which under the federal bankruptcy statute’s “wildcard exemption” can be protected up to $13,900 from being used by the bankruptcy trustee to pay back your creditors. See 11 U.S.C. §522(d)(5).
However, an additional player when it comes to bankruptcy and checking accounts is the bank itself, and you must be concerned with what your bank will do once it becomes notified of your bankruptcy.
How Does a Chapter 7 Trustee Check Your Bank Account?
The bankruptcy trustee tasked with administering your case is temporarily in charge of all your assets for the duration of your bankruptcy, including your bank accounts, which are part of the bankruptcy estate. This means the bankruptcy trustee will look at your bank account balance on the filing date.
As part of your bankruptcy petition, you will be required to disclose all cash in all bank accounts at the time of filing your schedules. You must be honest with all your disclosures, as the trustee will be granted access to your accounts to check the balances. Also, your bank account filings are court documents filed under penalty of perjury. As a general rule, you should plan to lose any amount over and above the exemption amount provided for in 11 U.S.C. §522(d)(5) (Texas has no specific exemption for bank account funds so the federal exemption is applied).
How Does a Chapter 13 Trustee Check Your Bank Account?
As stated above, the bankruptcy trustee tasked with administering your case and your bankruptcy estate is granted access to your Chapter 13 bank accounts (or Chapter 7 bank accounts) beginning on the filing date. The trustee will gain this access and information through your bankruptcy schedules, which you file as sworn court documents when initiating bankruptcy.
Can You Open a Bank Account after Filing Bankruptcy?
There are no restrictions on opening a bank account in the federal Bankruptcy Code or procedural court rules of Bankruptcy Court, and orders prohibiting a filer from doing so are issued rarely, if ever. However, many banks will run a credit report before granting you access to a checking account, which will flag after you file your bankruptcy and for some time will result in a dramatically low score. Due to the low score, some banks may not wish to give you a checking account, and you may find yourself having to shop around.
This blog article will cover more about how long bankruptcy stays on your credit report.
What Happens to Your Bank Account When You File Bankruptcy?
Filing bankruptcy does not automatically “stop” or “freeze” your finances. The bankruptcy law recognizes that you have an on-going need to pay for utilities, food, the rent, etc. Rather, any freezing of bank accounts is a decision made by the bank under certain circumstances and for certain reasons as discussed in this section.
If your bank is one of your creditors and you have a deposit account at the bank, the bank may freeze your assets to enforce its right to “setoff” what you owe against your balance. A setoff permits the bank to apply money from your checking or savings account to pay a bank-held debt, like an overdraft or a defaulted loan.
The 1995 United States Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995) affirmed the right of a bank to freeze an account and withhold funds so that it has time to make a request for setoff from the bankruptcy court.
If your bank is not one of your creditors, the bank may freeze your account immediately upon notice of your bankruptcy from the court clerk, whether it is owed money or not, as an “administrative hold.” Though the bank may have good intentions, such as trying to protect your money from creditors, the process of account freezing without the direction of the account holder or the trustee, and when the bank is not a creditor, continues to be challenged in the courts.
Bank May Freeze Account to Protect Your Money
As we have discussed, when you file bankruptcy, all your property becomes part of the bankruptcy estate, and under the control of the bankruptcy trustee.
You are entitled, however, to keep certain assets to ensure your “fresh start” at the conclusion of the case, called exemptions, and these exemptions include up to $13,900 under the “wild card” exemption for assets (the federal Bankruptcy Code covering exemptions is sometimes applied where states have weaker exemptions in a particular area). To help you with this, some banks have internal policies to freeze your account upon being notified that you have filed bankruptcy.
Bank May Freeze Account for Setoff
Many people owe money to the same institution where they have a checking, savings, or investment account. In other words, they have accounts at the same institutions they took out loans from, a fairly common practice with both Main Street and Wall Street size banking institutions.
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. It is thus within the bank’s right to freeze your account for setoff when it becomes notified of your bankruptcy and is therefore not an advisable practice to take out loans with banks where you keep your money, particularly if your financial future is uncertain.
Preparing for a Bank Setoff
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 Chapter 13 Bankruptcy is to stop all automatic drafts of payments on bills, for utilities, and similar.
If you are unable to stop auto payments before you file for bankruptcy, you can notify an important creditor yourself that you have filed for bankruptcy and ask them to stop drafting automatic payments from your bank. Your attorney can help you draft formal notices in this regard to send to your creditors and your banks.
Another strategy is to move your checking, savings, and other financial accounts to a new bank before filing for bankruptcy. Although you are required to disclose these funds, this will stop the bank from freezing them if the bank is a creditor entitled to a setoff.
What to Do If the Bank Freezes Your Account
If a bank freezes your account, contact the bank as soon as possible to determine whether the bank froze your account to protect your money or to protect its right to offset. This will help you understand the full picture of whether you can free up the money or are likely to have access to it in the future.
The Law Offices of Seth Kretzer Can Help You Prepare for Bankruptcy
When you are trying to figure out how to issues related to your bank accounts and bankruptcy, you will need a lawyer with specific experience on bankruptcy in Texas and who has the right knowledge and resources to help you. Contact the Law Offices of Seth Kretzer today to discuss your concerns about your bank account during bankruptcy.