Will I Lose My Bank Savings if I File For Bankruptcy?

bankruptcy savings

photo credit: Mukumbura

You may be wondering as to what happens to money held in a savings or checking account when you file for bankruptcy. In most situations, it depends on the individual laws of each state on whether the money is “exempt” from being claimed or not. However, you should know that even if you can keep your money, other possibilities might occur that would restrict your access to them such as the bank freezing the account or the money being used to pay off credit card debt.

Bankruptcy Petition and Listing Property

When you file for Chapter 7 bankruptcy, you are required by law to disclose all your property to the court by enumerating it in the bankruptcy petition. Once you’ve filed this petition, all the property that you have listed there goes into “bankruptcy estate” where it is put on hold for the creditors to claim.

However this doesn’t mean that you’ve just lost all your property. You’ll be able to keep basic things that you would need for home and work such as clothing, household furnishings, a car and even money. The amount that you can keep depends on the laws of the state you’re in. These laws are called exemptions.

Exempting Your Savings or Checking Account Funds

If you’ve filed for bankruptcy and want to keep the funds from your bank account you have you must:

  1. Find out if the state exemption laws allow you to keep the money
  2. Tell the court and trustee specified in the bankruptcy documents that you wish to keep the money.

If you fail to do this, you may end up owing money to the bankruptcy trustee.

How Much Money Can You Keep?

The majority of states have exemption statutes that specify which property you can keep when you file for bankruptcy. (Use this website to find out the bankruptcy exemption statute in your state.) As long as the state says you can “exempt” your property from being claimed, and you tell them you wish to do so in your petition (legally referred to as “claiming the money to be exempt”), the the bankruptcy trustee cannot touch the money. So the first step in exempting your money is to find out whether you actually have the legal basis to do so.

The states that allow you to exempt money from bank accounts have a limit on the amount of money you can retain. This means that if you have $20,000 in your savings account and your state allows only $5000 to be exempt, you will have to turn the remaining $15,000 to the bankruptcy trustee.

But what happens when the state you’re in does not have an exemption for bank account founds? In this case, you should check for wildcard exemptions which allow you to exempt any type of property up to a certain specified dollar amount. A wildcard exemption will come in handy if you want to protect a part or all of the money in your bank account.

Another thing to keep in mind is if the funds in your bank account came from a source that is exempted in bankruptcy. If you can trace and prove that those funds came from such a source, you may be able to keep the money. One example of such money is alimony or child support payments. (Make sure though not to mix exempt and nonexempt money in the same account. Sometimes, through commingling, the exempt funds might lose their exempt status.)

How and when to claim the funds as exempt

When claiming your money as exempt, be absolutely certain that the amount you claim as exempt on your bankruptcy papers reflects the actual amount you have in your bank account on the day that you file for bankruptcy. Failure to get this important detail right might result in loss of money.

Declaring how much you have in your account is not as cut-and-dry as you think. When you make an online payment for example, it is common for the payment to be put on hold so the funds are not taken out of your account immediately. If you’re writing down all you spend in your check ledger, the amount you have on file might not be the amount you have in your bank account – the actual balance might be higher. If you have the ability to check your account online, you might see that checks and online payments have not yet cleared. It is advised to wait until they have before you file for bankruptcy otherwise you could end up paying the trustee some hefty sums. Below you will find an example of this:

You file for Chapter 7 bankruptcy on February 1, 2014. You review your check ledger and see that you have $3000 in your bank account. Luckily, your state exemption statute says that you can exempt $3000 in funds held in bank accounts. You claim these funds as exempt on your bankruptcy filing. You have made a number of online payments, payed rent and bought groceries before February 1, 2014 and these payments have not been cleared by February 1. This would indicate that your bank account balance was actually $5000 instead of $3000 at the time that you filed for bankruptcy. Because state laws indicate that only $3000 is exempt from bankruptcy, you would have to turn over the unprotected $2000. However, if you had waited until the checks and remaining payments had cleared and then filed for bankruptcy, you would not own the bankruptcy trustee $2000.

This mistake can be easily avoided by checking your bank account balance right before you file for bankruptcy. Why wake up with a hefty surprise when you can prevent it?

Other problems that can appear

There are other pitfalls that may stop you from using the funds in your bank account. The most common ones is the bank freezing your assets or using the money to offset credit card bills.

Frozen Accounts

Some bank accounts have an automatic procedure of freezing a bank account when they find out that client X has filed for bankruptcy. This is done in order to protect the assets for the bankruptcy estate, in case the court or trustee decides that the assets have to go to the creditors. However this does not mean that you’ve completely lost the money. Banks will release the frozen funds if the trustee tells the bank to do so. The trustee will do this if you have properly exempted the money by telling them when you file for bankruptcy. Unfortunately, this can leave you temporarily unable to pay any bills if it occurs.

Funds used to offset other bills

Once somebody has filed for bankruptcy, creditors are required by law to stop all collection efforts against you. An exception to this rule is the offset or the set off. While credit card companies might not be able to ask you to continue your payments, they might turn to directly accessing the funds in your account in order to pay for your outstanding credit card balance.