Keeping a Checking Account During Chapter 7 Bankruptcy

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Written by Jonathan Petts, Esq.  
Updated June 18, 2020

Summary

If your account is being garnished, the bankruptcy case should stop the garnishment. The garnishment should not start again if the debt is wiped out in the bankruptcy case. However, if the garnishment is for alimony, child support, or taxes, the bankruptcy won’t wipe out the debt and the garnishment continues.

Many people are concerned about their property when they file Chapter 7, including whether or not they can keep their checking account. It's natural to be worried about keeping a checking account and other property when filing for bankruptcy relief.

In most cases, bank accounts in a Chapter 7 case are not impacted when you file your case. However, we look at keeping a checking account in Chapter 7 more closely in this article.

Can I keep a checking account after filing a Chapter 7 bankruptcy case

Keeping a checking account during a Chapter 7 bankruptcy case depends on several factors. You are not required by law to close your bank accounts or change banks after filing bankruptcy. However, you may want to stop using a bank account or change banks under some circumstances.

Let’s look at a few common factors that affect bank accounts during a Chapter 7 case. Some of these factors may impact your decision whether keeping a checking account when filing Chapter 7 is a good idea.

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Are there limits on the amount I can keep in my account?

One of the factors that you need to consider when keeping a bank account during Chapter 7 is how much money is in the account when you file your Chapter 7 bankruptcy petition. If you have too much money in your checking account, the Chapter 7 trustee may take the funds in the account to pay your debts.

The amount of money you can keep after you file Chapter 7 varies by state. As you complete your paperwork, review the bankruptcy exemptions for your state to determine how much money is safe to have in your bank accounts when filing Chapter 7. The exemptions that impact your bank accounts are usually “Deposits of Money” or the “Wildcard” exemption, although these names can vary depending on where you live.

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What should I do if I have too much money in my checking account before filing a Chapter 7?

It is okay to. . .

  • Pay your monthly bills. The safe way to spend money that you might not be able to keep if you file Chapter 7 is to pay your living expenses, mortgage payments, car payments, and utility bills.

It's not okay to. . .

  • “Spend down” by paying creditors large amounts. You must be careful how you “spend down” money in a checking account before filing Chapter 7. Large payments to creditors right before filing a bankruptcy case can be a problem. The trustee could file a lawsuit to get that money back, so doing this won't really benefit anyone.

  • Paying back family and friends. Paying back family members or friends in the 12 months before your case is filed can also be a problem. The Bankruptcy Code considers this unfair because you're preferring a specific type of creditor (family and friends, also called insiders) over your other creditors. The trustee can file an adversary proceeding against your family member/friend to get the money back from them.

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Can I keep a checking account that overdrafted?

Generally you can, but that will require you to pay back the amount you overdrafted by (including any overdraft fees you may have incurred) to bring your account back to a positive balance. Since the negative balance is otherwise discharged like any other unsecured debt, it is often a better idea to open a new account before filing your case and start fresh.

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What happens if I owe a debt to the bank that I have my bank account with?

If you owe money to your bank or credit union, the company may have the right to set-off the debts if you do not pay the debts. A set-off means that the bank or credit union deducts what you owe to the company from the funds in your bank account.

There are limitations for set offs. For example, filing a Chapter 7 bankruptcy case stops the bank or credit union from taking money from your checking account without court approval. However, if the bank or credit union violates the law, it can be difficult, time-consuming, and costly to fight to get your money back.

Therefore, before you file, it is usually a good idea to open a new account with a bank you don't owe money to, so that you can start off with a clean slate.

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Can a bank freeze my bank account when I file Chapter 7?

Some banks have taken the position that they need to “freeze” bank accounts with certain balances if the person files for bankruptcy relief. This decision is not based on any laws requiring the banks to do so. Usually, a bank decides to freeze your account based on its own rules.

For example, Wells Fargo is known to freeze checking accounts when a bankruptcy is filed. If your bank freezes your bank account, you must file legal documents with the court asking it to force the bank to “unfreeze” the account. If all of your banking is done at Wells Fargo, you may consider opening a new bank account with a different bank and moving your money to that account before filing your case.

Keeping a low balance in your checking account as of the filing date of your Chapter 7 is the best way to avoid this issue, especially if you are keeping a checking account. When your checking account balance is low, the bank is less likely to freeze the account.

However, remember you must report how much cash you have that is not in a bank account as of the date you file your bankruptcy forms. Don’t forget to take this into account if you withdraw some funds from your checking account before filing a Chapter 7 bankruptcy case.

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How will bankruptcy affect my accounts that have liens or are being garnished?

If you used your checking account to secure a loan, the bank can take the money in your account. Bankruptcy may not stop this from happening because the loan is “secured.” A secured loan means that the bank holds a lien on property (in this case your checking account) in case you don’t pay the debt.

Some people also run into this issue if they owe back taxes to the IRS.

If your account is being garnished, the bankruptcy case should stop the garnishment. The garnishment should not start again if the debt is wiped out in the bankruptcy case. However, if the garnishment is for alimony, child support, or taxes, the bankruptcy won’t wipe out the debt and the garnishment continues.

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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 disclose this on your Schedule A/B 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. You should disclose this to the court 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.

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Conclusion

The above issues don't come up in most Chapter 7 cases filed by low-income individuals. Many people who file a Chapter 7 case don't have a lot of money in their checking account.

They have been struggling and living paycheck-to-paycheck, so keeping a checking account after filing Chapter 7 is not a problem because the balance in the account is probably very low.

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