Protecting bank account funds is a priority for most people filing for Chapter 7 or Chapter 13. How bankruptcy will affect your cash or bank account deposits will depend on whether a bankruptcy exemption protects the money and whether you can do some prebankruptcy planning to protect nonexempt funds.
In bankruptcy, you can protect "exempt" property. If an exemption covers the funds in your bank account, you won't have to worry about losing the money in Chapter 7 or paying it back through your Chapter 13 repayment plan. If an exemption doesn't cover part of your cash or bank account deposits, you might still be able to protect some or all of these funds by some careful prebankruptcy planning (more below).
Each state has a different set of bankruptcy exemptions, so keeping your bank account will depend on where you live, the value of the funds in the account, and the exemptions available to you. When reviewing your state's exemptions, you'll want to look for an exemption that covers either:
Keep in mind that most states don't allow filers to protect much in the way of cash or bank account funds. When you can use an exemption to protect funds, the amount will be minimal—$300 being relatively standard. Also, it's essential to be sure that any deposit account fund exemption you plan to use will cover the balance of money in your bank account, not just "cash" (you might have to withdraw the funds—check with your lawyer) or a specific account, like a CD (it would be unlikely to find an exemption as specific as "CD exemption.")
If the first two options aren't available, you'll want to explore whether your state offers a wildcard exemption. A wildcard exemption allows you to protect any property of your choosing up to a particular value. However, some states limit the application by excluding specific property, such as real estate equity. And a few state wildcard exemptions can't be used for account funds, but that's the exception, not the rule.
Some states let filers choose between the state and federal exemptions. If you have this option, it's worth exploring, because the federal wildcard exemption is often more generous than state wildcard exemptions. One drawback is that it's a take it or leave it proposition. You have to use all state exemptions or all federal exemptions. So it will be a matter of deciding which system protects the most property or the assets most important to you.
You can always use your funds to purchase necessary things, such as food, housing, clothing, and medical care. If you're worried about losing money because you can't exempt it, spend it before filing for bankruptcy. Just be sure to keep good records unless the bankruptcy trustee questions your actions. If you can't spend all of the money before filing, chances are you aren't bankrupt.
Be careful if you owe your bank or credit union any money when you file 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). The institution has the right to "set off" the debts owed to it against any bank account funds you may have with them. Banks and credit unions have the right to set-off your accounts at any time, regardless of whether or not you file for bankruptcy.
Although banks rarely exercise their set-off rights, it makes sense to take precautions before filing for bankruptcy. The best way to avoid a set-off is to withdraw the funds from any account held with a bank or credit union to which you owe a debt.
It's also possible that your bank will "freeze" your accounts once you file for bankruptcy. Several banks and credit unions do this to preserve account funds until the bankruptcy trustee decides what to do with them. Although a judge will eventually "unfreeze" the accounts, it could take several weeks (the quicker method is to call your trustee—the trustee will often instruct the bank to release the funds). But the best precaution is to withdraw funds before bankruptcy and spend them on necessary items or transfer the funds to a different bank.
Prebankruptcy planning, also called asset conversion, is the legal method of reorganizing assets to protect as much property as possible from creditors. (It's important to stress "legal" because not all prebankruptcy planning is appropriate. To avoid getting yourself in hot water, you should consult with a bankruptcy attorney before undertaking it.) In the context of bank accounts, this would amount to using funds over the exemption amount to purchase or invest in exempt assets.
While bankruptcy law allows you to convert nonexempt property into exempt property if you are acting in "good faith," it does not allow you to attempt to hinder, delay, or defraud creditors. You should tread very carefully if you want to convert bank account funds to exempt property. Here's why:
When converting cash or bank accounts to other property before bankruptcy, avoid overly aggressive tactics. When in doubt, consult with an experienced bankruptcy attorney. Local attorneys often have a good sense as to what your local court will consider legitimate prebankruptcy planning tactics and what will get you into trouble.
If the bankruptcy court believes you intended to defraud creditors with your asset conversion, it may impose civil or criminal penalties. In deciding if you intended to defraud creditors, courts look at several factors, including whether:
If you are considering what to do with your nonexempt bank account funds, keep these tips in mind:
Learn about retirement accounts in 401ks and Retirement Accounts in Bankruptcy.