Whether you'll lose your overdraft protection depends on the type of protection you have.
Written by Attorney Andrea Wimmer.
Updated October 30, 2020
Banks offer overdraft protection to allow their customers’ transactions to go through even if they don't have enough funds in their bank account to cover the full amount. This has a lot of benefits, as it avoids the embarrassment, hassle, and merchant fees commonly associated with having a payment rejected due to insufficient funds. How a bankruptcy filing affects your overdraft protection depends on what type of overdraft protection you have.
Another Bank Account
One type of overdraft protection is to connect your checking account to another account (often a savings account) with the same bank. If you overdraft your checking account, the necessary amount will be transferred from your overdraft protection account to your checking account. This setup won't be affected by a bankruptcy filing as you're using your own funds to safeguard against overdrafts.
Bank-Issued Credit Card
Another type of overdraft protection connects the customer’s checking account with their credit card account from the same bank. If there isn't enough money in your checking account to cover a check or debit card purchase, the credit card account is used to cover the difference. Oftentimes, these types of transactions incur a transaction fee and a higher interest rate than a regular credit card purchase.
Since your credit card account will be closed by the bank once your case is filed and the balance on the account discharged, you won't be able to rely on this in the future. To see whether you can set up a new/alternative method to ensure overdraft protection is active for your checking account, speak to your bank directly after your bankruptcy discharge has been granted.
Line of Credit
A line of credit is like a bank loan that you borrow against up to a certain amount. Similar to credit card accounts, your line of credit will be closed by the bank once your bankruptcy case is filed.
If you're banking with a credit union, note that different rules may apply. Credit unions often require their members to pledge their bank account balance as a security for credit cards or other loans and many consider a bankruptcy filing a breach of the membership agreement. This in turn often means that the member loses both their overdraft protection and their checking and savings accounts.
Remember: Credit cards and lines of credit are typically closed by the credit card company or bank even if they have a zero balance on the filing date. While they’re not listed as a debt on your forms, the bank will eventually learn of your filing, and close the account in accordance with the terms of your credit card or loan agreement.
How Bank Accounts With A Negative Balance Are Treated In Bankruptcy
If you don't have overdraft protection, or you've already maxed it out and have a negative balance in your bank account, it may be best to open a new bank account altogether. The over drafted account will be treated like any other debt and discharged as part of your Chapter 7 bankruptcy case.
While it may be a pain to update your direct deposit information, doing so will ensure that you get the full benefit of your next deposit, rather than giving some of it to the bank on a debt that's already getting discharged. Of course, if it's only a matter of a few dollars and you want to keep the account, it's ok to wait until you can bring the account back to a positive balance before filing. For more information on keeping a checking account when filing bankruptcy, check out this article from Upsolve’s Learning Center.