Will I Lose Bank Account Funds if I File for Bankruptcy?

Find out if you can keep money you have in a savings or checking out when you file for Chapter 7 bankruptcy.

If you file for bankruptcy, you can keep the funds in your bank account as long as your state has a rule allowing you to “exempt” the money. You should be aware, however, that there are other pitfalls when it comes to bankruptcy and bank accounts, such as your bank freezing it, or using the funds to pay your credit card debt.

Listing Your Property in Your Bankruptcy Petition

When you file bankruptcy, you must disclose all of your property to the court by listing it in your bankruptcy petition. (Learn more about how you disclose personal property in bankruptcy.) This is because once you file, everything you own goes into the “bankruptcy estate” where it is held for the benefit of your creditors.

You do not necessarily lose all of your property, though. You get to keep basic things that you need for home and work, such as household furnishings, clothing, a modest car, and even money. How much you can keep depends on the rules of your state -- the state laws that set forth what you can keep are referred to as exemptions. (Learn more about how exemptions work in Chapter 7 bankruptcy.)

Exempting Your Bank Account Funds

In order to keep bank account funds in bankruptcy, you must:

  • determine if your state exemptions laws say you can keep the money, and
  • if they do, then tell the court and trustee in your bankruptcy papers that you wish to exempt this money.

If you don’t, you could end up owing money to the bankruptcy trustee instead.

How Much Does Your State Say You Can Keep?

Most states have exemption statutes that tell you what property you can keep when you file bankruptcy. Find your state bankruptcy exemptions.) As long as your state law says you can “exempt” the property, and you indicate your wish to do so in your petition (called claiming the money as exempt), then the bankruptcy trustee cannot take the funds. So, your first step is to find out what your state says you can exempt.

Most states that allow you to exempt bank account funds put a limit on the amount you can keep. So if you have $15,000 in your account and your state allows you to exempt $5,000, you'll have to turn over $10,000 to the bankruptcy trustee.

Even if your state does not have a special exemption for bank account funds, it might have a wildcard exemption that allows you to exempt any type of property up to a certain dollar amount. You could use a wildcard exemption to protect all or some of the money in a bank account.

Also keep in mind that if the money in your account comes from a source that is exempted in bankruptcy, and you can trace those funds from the source, then you may be able to keep them. For example, if you have money in your account that is from child support payments, you can most likely exempt that money. (It's best not to commingle exempt and nonexempt funds in an account, however. Some otherwise exempt money might lose it's exempt status if it's mixed with nonexempt money.)

Claiming the Funds as Exempt: Timing and Accuracy

When protecting the funds in your bank accounts, it is crucial that the amount you claim as exempt on your bankruptcy papers reflects the actual amount of money in your bank account on the day you file bankruptcy. If you do not get it right, you may end up losing money.

Declaring how much you have in your account can be trickier than you might think. When you write a check or make an online payment, the funds do not usually come out of your account right away. If you are recording those amounts in your check ledger, your ledger’s balance for a certain date won’t necessarily be the actual balance that’s in your account on that day; the actual balance may be higher. If you check your account online and realize that checks or online payments haven’t yet cleared, you can wait to file for bankruptcy until they do. If you don’t wait, you might end up having to pay the trustee a bundle of money. Here’s an example of how this works.

You can avoid this pitfall by checking your account balance right before you file for bankruptcy. That way, you won’t encounter any surprises and can better time the filing of your petition.

Other Potential Bank Account Problems

It is a good idea to be aware of other potential bank account pitfalls that may leave you in a difficult financial position when you file for bankruptcy. These include the bank freezing your account or using the money to offset other bills.

Frozen Accounts

Some banks automatically freeze your bank account when it finds out about your bankruptcy. The bank does this in an effort to preserve the assets for the bankruptcy estate, in case the trustee or court finds that it should go to your creditors. This does not mean that you won’t get your funds back, however. The bank will release the funds if the bankruptcy trustee tells the bank to do so because you properly exempted the money. Of course, this may leave you without money to pay your bills in the meantime. (Find out more about frozen bank accounts.)

Funds Taken to Offset Other Bills

Once you file for bankruptcy, your creditors must stop all collection efforts against you. There is one exception, however, that can cause unexpected grief, called a set off, or offset. While your credit card company cannot continue to ask you to make payments, if you have a credit card from your bank, your bank can dip into your account and use the money to pay your outstanding credit card balance. (Learn more about bank setoffs.)

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