What Happens to Your Bank Accounts in a Chapter 7 Bankruptcy?

Filing for bankruptcy is a difficult thing to consider. You may be concerned about what will happen to your finances, your job, your family, and your bank accounts. For many people considering bankruptcy, the thought of having their bank accounts monitored or even close can be disturbing. 

Generally, your bank will not close your bank accounts simply because you have filed for bankruptcy. You can keep your accounts open if you do not accrue a negative balance for too long of a time frame. If your bank account has a negative balance because of fees or overdrawn tracks, your bank may choose to close your bank account. You may be unable to keep the money in your bank account after filing for bankruptcy. 

What Happens to Your Bank Account When You File for Bankruptcy?

Once you file a bankruptcy petition, some banks may freeze your account as soon as they receive the bankruptcy notice. If you put money into that account as part of your income from your paycheck, your bankruptcy attorney can notify the trustee overseeing your case. In every bankruptcy case, the court will assign a trustee to manage the case. When the trustee can notify your bank and request that they unfreeze your bank account so you can use the money in the bank account to pay your basic bills. 

If you have taken out a loan secured through a savings account with your bank, the money in the savings account may be frozen and used to pay for your debt if you file for a Chapter 7 bankruptcy. A bankruptcy attorney can help you understand what could happen to a secured loan through a savings account. 

In short, you will be allowed to continue banking at your current bank, and the bankruptcy court will not close your account. You will not wake up to a surprise withdrawal in which the bankruptcy court takes all your money for your rent or groceries. Once you file for bankruptcy, the automatic stay should stop other parties who may have a right to garnish your wages or take money from your bank account in response to a judgment. Filing for bankruptcy gives you time to pause and develop a strategy for beginning your financial future.

The Court Will Ask for Copies of Your Bank Statements

The bankruptcy trustee will want to see copies of your bank statements. The cash you have on hand in your checking and savings accounts are considered assets, and that matters. You will probably be required to report your approximate balances when you complete your paperwork. 

The trustee overseeing your case is entitled to audit your bank accounts randomly or because the trustee sees a red flag that increases suspicions. One of the best things you can do is avoid hiding bank accounts from trustees because you’re concerned about what they will do with the information. Working with a bankruptcy attorney can also help you ensure you have provided all of the necessary documents to the trustee and make the process go smoothly. 

The Type of Bankruptcy Matters

The type of bankruptcy you are filing will impact what happens to your bank accounts. For example, if you are filing for Chapter 7 bankruptcy, the trustee may take a portion of the funds in your bank account to pay off your creditors. Some of the money may be protected by exemptions. Additionally, the trustee cannot take your recent Social Security benefits or your paycheck. 

Alternatively, in a Chapter 13 bankruptcy, the trustee can free your bank accounts and use a portion of the assets to pay creditors as long as the money is not exempt. This process occurs at the beginning of the case. If you can show that you need that money for a necessity, they can and frequently do release the claim against your assets. You can expect some oversight when filing a Chapter 13 Bankruptcy. You will have to report any sudden windfalls you may receive to the trustee. For example, you will need to report that income immediately if you receive a bonus through your job. 

Generally, once your monthly payment has been set, you will make that specific payment, and the trustee will not have a reason to access the money in your bank account. Finally, strategies to organize your assets in Chapter 7 and Chapter 13 bankruptcy will allow you to protect as much property as possible with the help of an experienced bankruptcy attorney. 

Savings Accounts

After filing for Chapter 7 bankruptcy, when you’re done, you’re done. The trustee may use some of your existing savings that are not exempted to pay off your dischargeable debt. However, once the discharge has been finalized, you have the authority to do whatever you would like with your money, including saving your money. Saving money is more challenging when filing for Chapter 13 bankruptcy. You will not have much of a budget to save money. Most of the time, a petitioner’s assets will go toward paying their monthly bankruptcy payment. 

If you keep your same bank and savings account and begin saving too much money, doing so could invoke “set off” rights. These rights are usually included in a loan agreement. Set off rights allow creditors to close your bank account and take the money to pay the ones you owe them if you file for bankruptcy. Depending on the facts in your case, you may want to switch banks before you file for bankruptcy to reduce stress and headaches.

Protecting Yourself

Working with a bankruptcy attorney can help you protect as many of your assets as possible while you proceed through the bankruptcy process. If you are filing for Chapter 7 bankruptcy, making sure you have minimal money in your bank account can help. Ensuring that you exempt cash is essential. Using money for necessary items, such as needed clothing, rent, utilities, food, rent, and essential car repairs. Make sure you keep all your receipts to prove that you are using assets in your bank account to show you are using assets on necessities.