Typically, the average individual’s bank accounts are not affected when filing for Chapter 7 bankruptcy. Bank accounts, whether checking or savings, are not automatically prohibited, closed, or garnished by virtue of filing for Chapter 7.
However, there are certain circumstances or situations that may affect the status or amount of your bank account when filing for Chapter 7.
The most common factors affecting bank accounts after filing for Chapter 7 are:
- When the debtor’s cumulative bank or credit union account balances exceed the allowable exemption amount.
- When the debtor owes money to the bank or credit union with which the funds are deposited.
- When specific institutions (such as Wells Fargo and Union Bank) implement policies to freeze the debtor’s bank accounts upon the Chapter 7 filing.
Is the Money in Your Bank Account Protected by an Exemption?
In Chapter 7 bankruptcy, the bankruptcy trustee is tasked with taking over all nonexempt assets and selling them in order to repay as much of your outstanding debt as possible. This means that if any funds in bank accounts at the time of your bankruptcy filing cannot be exempted, you must turn them over to the trustee.
Allowable exemption amounts for bank accounts vary from state to state. If your state doesn't have a specific exemption for bank account funds, you may also be able to use a wildcard exemption. Some states allow bankruptcy filers to use unused homestead exemption amounts for personal property (like cash and bank account funds) as well.
Here's an example of how state exemptions can protect your funds. Say you live in a state that provides an exemption in the amount of $1,500 for bank account funds. It also has a wildcard exemption, which you can apply to any personal property, in the amount of $2,500. If you have $3,000 in your bank account, all of that money is protected -- you can use your state's $1,500 bank account exemption and $1,500 of your state's wildcard exemption.
Some states allow debtors to choose between state and federal exemptions. Those states are Arkansas, Connecticut, District of Columbia, Hawaii, Kentucky, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New Mexico, New York, Pennsylvania, Rhode Island, Texas, Vermont, Washington, Wisconsin. If you live in one of those states and choose to use the federal exemptions, you can use a wildcard exemption in the amount of $1,150 plus up to $10,825 of any unused amount provided by the homestead exemption. If a married couple files jointly for bankruptcy, they can double the amount of these exemptions. Some state exemption schemes allow doubling as well.
The Bank’s Ability to “Set-Off” Your Accounts
If you owe your bank or credit union any money at the time of filing for bankruptcy (such as past due fees) or if your bank or credit union has extended credit to you (such as a loan, mortgage, or credit card), that institution has the right to “set off” the debts owed to it against any bank account funds you may have with them.
This means that upon filing for Chapter 7, the bank may keep the funds in your checking or savings account to satisfy any debt owed to it. Members of credit unions are frequently concerned with this issue because credit unions often extend personal loans, auto loans, mortgages, and credit cards to their members. In addition, while Regulation Z of the Truth in Lending Act places limits on national banks’ right to use set-off to pay credit card debts, local banks and credit unions are not affected by such regulations.
Although banks and credit unions have the right to set-off at any time, regardless of whether or not you file for bankruptcy, they rarely exercise theses rights. In addition, for these institutions to exercise their rights, the debt must still be owed to the bank at the time of set-off. Thus, set-off based on credit card debt is not always possible because banks frequently sell the debt to other institutions, especially when the debtor is delinquent.
Another limitation on set-off is the “automatic stay,” which goes into effect immediately after filing for bankruptcy. The automatic stay is a powerful tool which prevents any and all forms of collection activity, from the date of filing to discharge, in order to give the debtor the full protections and benefits of bankruptcy. Thus, before any bank or credit union can exercise set-off, it must seek permission from the bankruptcy court and obtain relief from the automatic stay. Most courts will not allow the set-off.
Wells Fargo’s “Freezing Approach”
Recently, there have been reports that Wells Fargo, Union Bank, and their subsidiaries, such as Wachovia, have begun to freeze the bank accounts of individuals filing for bankruptcy whether or not such individuals owed money to the banks. These banks argue that, since all of the debtor’s assets come under the control of the bankruptcy trustee immediately after filing for Chapter 7 until discharge, they are freezing the accounts to protect the funds for the trustee.
When a bank freezes an account after bankruptcy is filed, the debtor must petition the bankruptcy trustee or file a motion with the court (depending on the court rules) to have the funds released. Although the trustee or judge will eventually authorize “unfreezing” the accounts if no money is owed and if the money in the funds is within the exemption amounts, this process could take anywhere from a few days to a few weeks.
While it is unclear whether or not other banks will follow Wells Fargo’s “freezing approach,” the Bankruptcy Appellate Panel for the Ninth Circuit decided in 2010 that Wells Fargo violated the automatic stay when it froze the bank account of a debtor who had filed for Chapter 7. However, other circuits may interpret the issue differently.