Protecting bank account funds is a priority for most people filing for Chapter 7 or 13 bankruptcy. How bankruptcy will affect your cash or bank account deposits depends on whether the money is protected by a bankruptcy exemption and whether you are able to do some pre-bankruptcy planning to protect money that is not exempt in bankruptcy.
In bankruptcy, some of your property is “exempt,” which means it does not become part of your bankruptcy estate. In Chapter 7 bankruptcy, the trustee cannot take exempt property, which means you get to keep it. In Chapter 13, your property is safe, but you must pay back the amount of your nonexempt property during the life of your repayment plan.
If the funds in your bank account are covered by an exemption, you don’t have to worry about losing the money or having to pay it back through your Chapter 13 plan.
If part of your cash or bank account deposits is not covered by an exemption, you may still be able to protect some or all of these funds by some careful pre-bankruptcy planning.
Pre-bankruptcy planning, also called asset conversion, is the legal method of reorganizing assets in order to protect as much property as possible from creditors. 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 to be legitimate pre-bankruptcy planning tactics and what will get you into trouble.
Most courts recognize that, absent fraudulent intent on the part of the debtor, asset conversion is allowed in order to make full use of statutory exemptions, even if done on the eve of bankruptcy. Courts will generally allow you to use nonexempt portions of your bank account funds in order to:
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 a number of factors, including whether:
If you are considering what to do with your non-exempt bank account funds, keep these tips in mind:
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. 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, notably Wells Fargo and Union Bank, have done this to preserve account the funds until the bankruptcy trustee decides what to do with them. Although a judge will eventually “unfreeze” the accounts, it could take several weeks. Again, the best precaution is to withdraw funds from a Wells Fargo or Union Bank account prior to bankruptcy or transfer the funds to a different bank.