What Happens to Your Bank Accounts in Chapter 7 Bankruptcy? (2024)

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. The good news? Avoiding banking-related problems in Chapter 7 is simple once you're familiar with the following key issues:

• Can you "exempt" or 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 prebankruptcy planning can help, the best way to avoid unexpected issues is to consult with a knowledgeable bankruptcy lawyer before filing your Chapter 7 case.

Protect Bank Account Balances With Chapter 7 Bankruptcy Exemptions

Fortunately, you don't lose everything when you file for bankruptcy. You can keep all assets covered by your state's bankruptcy exemption laws.

Does an Exemption Protect Your Bank Balance?

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. Unfortunately, most states don't offer much protection when it comes to cash and bank accounts. The average exemption is 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. Another approach is to check whether your state allows you to use the federal bankruptcy exemptions instead of the state exemptions. The federal bankruptcy exemptions offer a substantial wildcard exemption.

Are You Protecting Enough Money?

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.

Here's how this often plays out. 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.

The Bank Can "Set-Off" (Pay) Debt With Bank Account Funds

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 a loan, mortgage, or credit card. So if you've fallen behind on your payments—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 case.

How to avoid this problem. The best course of action is to open a new account at a bank or credit union to which you don't owe money and use the new account going forward. Just remember to report both accounts on the bankruptcy form entitled Your Statement of Financial Affairs for Individuals Filing for Bankruptcy.

Your Bank Might Freeze Your Account After Chapter 7 Bankruptcy

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 bank's 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 responsible for managing your case. 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.

How to avoid this problem. As discussed above, you'll want to consider paying your bills before filing for bankruptcy. Ensure a minimal balance by withdrawing the funds and using cash for your debts. Just be sure to use the funds before you file and keep good receipts.

Opening a Bank Account After a Chapter 7 Bankruptcy

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 some time after filing for Chapter 7. Some debtors have reported problems doing so shortly after receiving a Chapter 7 discharge.

How to avoid this problem. 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.