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Keeping a Checking Account During Chapter 7 Bankruptcy

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In a Nutshell

In most Chapter 7 bankruptcy cases, nothing happens to the filer's bank account. As long as the money in your account is protected by an exemption, your bankruptcy filing won’t affect it.

Written by Attorney Jonathan Petts.  
Updated February 6, 2021


If you’re getting ready to file bankruptcy it’s normal to be worried about what happens to your bank account when you file. The good news is that in most Chapter 7 bankruptcy cases, nothing happens to bank accounts. Let’s tackle this topic one question at a time. 

What happens to your bank account when you file Chapter 7?

Your bank account is an asset that is listed on your bankruptcy forms. If you have multiple bank accounts (like a checking and a savings account) you have to list each separately. The value of this asset is based on the amount of money in the account when the case is filed. It’s important to note that this balance is not adjusted for pending transactions or outstanding checks. 

Is there a limit to how much money you can have in your bank account? 

Yes. The limit is based on the bankruptcy exemptions you’re claiming on your Schedule C. Some states have specific exemption laws to protect account balances. If your state has a specific exemption law for bank accounts, the most important thing to check is how much of your bank account balance it protects. There’s always some kind of limit.

If you’re able to claim a wildcard exemption, you can generally use it to protect money in your bank account and even cash on hand. But, make sure you double-check. Some states that have a wildcard exemption specifically bans people from using it to protect money. 

What if the money in my account is more than the available exemption? 

That can happen, especially if you file on payday. If it’s just a matter of fluctuating account balances based on your pay cycle, timing is everything. If you just got paid, go grocery shopping, pay this month’s utility bills or rent and fill up your gas tank. Chances are, that’s all it takes to get you below the limit. Remember though: 

Call out that says: The transaction has to clear for the money to come out  of your account. If it’s pending when you file, it’s still your  money and considered part of your bankruptcy estate.

What if I have more than I can spend on necessities and this month’s bills in my bank account?

In that case, start by asking yourself these two questions: 

  • Can I exempt the full amount? The federal bankruptcy exemptions have a pretty generous wildcard, so you may not have to worry about spending the money down.

  • What is the source of the funds? Some money is protected based on where it’s from. One example is social security funds. A separate exemption protects these funds as long as they’re not commingled (mixed) with other money. That’s why it’s never a bad idea to have a separate account that only social security funds are deposited into. If that sounds a bit confusing, check out this comment ⬇️ from our Facebook Community on how one Upsolver handled their social security funds: 

Facebook post about keeping SSDI in a separate account.

If your funds are not protected, your best bet is to spend the money on allowed items before filing your case. Otherwise, the bankruptcy trustee will ask for the nonexempt amount so it can be used to pay your creditors. They’ll ask for it even if you had to spend the money on necessities and bills after filing. 

What are allowed items I can spend the money on? 

That can be a little complicated, so check out the article titled Spending money before filing Chapter 7 bankruptcy in 2021 in our Learning Center. 

Here's a good rule of thumb to remember:

Picture of a pile of cash with the statement "Don't turn nonexempt cash into another nonexempt asset."

One thing you don’t want to do is use the money to pay back family members or friends. That is not allowed and while you won’t get into trouble for it, the trustee will ask for the money back. 

Do they freeze your bank account when you file Chapter 7?

Generally, no. Especially if the full amount in the account is protected by an exemption. Some banks (most notably, Wells Fargo) have an internal policy of freezing bank accounts with a balance over a certain amount once they learn about a bankruptcy filing. They’re really not supposed to do this as it can be quite a headache for the filer to get the account “unfrozen.” 

If all of your banking is done at Wells Fargo and you’re worried about having the account frozen, consider opening a new bank account with a different bank and moving your money to that account before filing your case.

What happens if I owe a debt to the bank where I have a bank account

Generally speaking, nothing much happens once a bankruptcy is filed. Before filing, the bank may take funds out of your account if you default on a credit card or loan payment. That’s called a set off and whether the bank can do this depends on the terms of your credit card agreement or loan. Once the bankruptcy petition is filed, the automatic stay prevents the bank from doing this. As long as your account is in good standing (i.e. it doesn’t have a negative balance) when you file for bankruptcy, you shouldn’t have any issues keeping your account. 

If you bank with a credit union, the rules may be different…

This is especially true if you have a loan or credit card with the same credit union. Your membership agreement with the credit union may give them a security interest in your account balance. In that case, your balance with the credit union may be considered their collateral, just like your car is the lender’s collateral for your car loan. Additionally, your bankruptcy filing may be considered a breach of the terms of your membership agreement. 

Check out the article titled Credit Unions & Bankruptcy in our Learning Center to find out more about how a bankruptcy filing may affect your credit union membership. 

What happens to my account if I have a negative balance due to an overdraft? 

That depends on what you want to do with the account. If you want to keep your account, you’ll have to bring it back to a positive balance after filing. Keep in mind that the negative balance can be discharged just like any other unsecured debt. Depending on how much you’re in the red, opening a new account and starting fresh may make more sense. Check out the article titled Overdraft Protection and Bankruptcy in our Learning Center for more on this topic. 

What happens if a creditor has a lien on my bank account? 

The automatic stay will prevent the creditor from taking any money (lien or no lien) after your case is filed. If it’s a judgment lien from an unsecured debt like a credit card or personal loan, the underlying debt will be eliminated when your discharge is entered. While it may take a little legwork on your part to get the lien released, a bankruptcy filing gives you the ability to do that. One possible exception to this general rule are liens for debts that can’t be discharged, like past-due taxes or domestic support obligations, like child support and alimony. 

How are joint checking accounts treated in bankruptcy?

If you're on a bank account with someone else (not your spouse), you have to make sure you list this on your bankruptcy forms the same way you would for a jointly owned car explained here

If it's your primary account and you can claim an exemption to protect the full balance, everything will stay basically the same. If you're on a joint checking account with someone for their primary checking account, it may be a good idea to remove yourself from the account before filing your case. If you do, make sure to list this on your Statement of Financial Affairs and may need to provide the trustee with documentation showing that you didn't make any deposits into the account in the months leading up to the filing.

If you're still on the joint account when your case is filed, whether the trustee can do anything with the account will depend on the law of the state you live in. So, if you're on a parent's or other relative's primary checking or savings account "just in case" and they have significant funds in the account, it's a good idea to talk to a bankruptcy attorney to find out how to handle this before your case is filed.

Can I get a checking account after filing Chapter 7 bankruptcy?

There’s nothing that says you can’t. It may actually be easier to get one than before because the bank knows that your discharge eliminated your debts. For some, bankruptcy is the best way to reenter the banking system. 

Let’s Summarize...

As long as the money in your account is protected by an exemption, your bankruptcy filing won’t affect it. Your case trustee may want to see some bank account statements as part of their review of your case but they won’t contact your bank, instead relying on you to provide the statements. In other words, if you don’t have any loans or credit cards through the same bank, they may not even find out about your filing until much later. 



Written By:

Attorney Jonathan Petts

LinkedIn

Jonathan Petts has over 10 years of experience in bankruptcy and is co-founder and Board Chair of Upsolve. Attorney Petts has an LLM in Bankruptcy from St. John's University, clerked for two federal bankruptcy judges, and worked at two top New York City law firms specializing in... read more about Attorney Jonathan Petts

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