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Is It True Banks Can Take Funds From Your Bank Account When You File Bankruptcy?

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Filing bankruptcy is supposed to ease your financial problems. Sometimes, though, it can make things worse if you're not properly prepared. Case in point, your bank may freeze your checking and savings accounts once it has been notified you filed for chapter 7 bankruptcy. Here's why this can happen and what you can do to protect yourself.

Bank's Right to Offset

When you took out a home or auto loan or got a credit card through your bank or credit union, you probably didn't realize you were pledging your checking and saving accounts as collateral. However, many banks build this clause (or something similar) into their contracts. If you have an account with the bank and you file bankruptcy, the bank has the right to offset its losses by taking money out of your account and applying it to the debt that's about to be discharged.

For instance, you have a credit card through your credit union and you file bankruptcy to eliminate the debt, the bank can take the $500 sitting in your checking account to mitigate its losses.

Although the bankruptcy court doesn't automatically protect the bank's right to do this and you probably could get the money back if you challenge the company in court, the loss of that cash can cause significant and immediate problems in your life. Therefore, it's important you take precautions before submitting your bankruptcy petition.

Bank Account Defense

When you are certain you're ready to file for bankruptcy, immediately stop writing checks on accounts at banks where you also have loans or credit cards. The bank will pull the money from your account without any regard to what you may have pending, which means you could end up with bounced checks and associated fees. Wait for any checks you have written to go through before moving forward with your filing. If you need a bank account, open one at a bank where you don't have any debts.

Be sure to cancel direct deposits to the affected accounts. ACH transactions generally cannot be recalled once they have been submitted. So, once your employer sends you paycheck to your checking account, it can't get the money back, for instance. To avoid having your entire paycheck confiscated to pay a bill you're trying to eradicate, cancel the direct deposit or transfer it to a different account.

Withdraw an excess money you may have in the account and either keep it on hand or move it to your new checking account. If you are a cosigner on other people's account (e.g. your child or parent), remove your name or move the cash to a new bank. The creditor may also take money from any account with your name on it, even if you're not the primary account holder.

For more tips on protecting cash in your bank account when filing for bankruptcy or help filling out and submitting a petition, contact a bankruptcy attorney who offers chapter 7 bankruptcy filing assistance.