You may be able to keep your checking account when you file for Chapter 7 bankruptcy. It depends on whether you:
- can claim the account as exempt, and
- owe money to the bank that holds your account.
Listing Your Checking Account in Your Bankruptcy Papers
When you file for bankruptcy, you must file papers with the court that list everything you own and everyone you owe money to (called the bankruptcy petition and schedules). Whether or not you intend to keep the account, you must include it in your bankruptcy petition and schedules. If you don't list it and the trustee finds out about it, will likely lose the money in the account even if you would have otherwise been allowed to keep all or part of it.
Claiming Your Checking Account As Exempt
If you can claim your checking account as exempt, the trustee will not be able to use the money in your account to pay creditors.
Exemptions are laws that set out the property you are allowed to exclude from your bankruptcy. If property is exempt, you can keep it in bankruptcy. Exemptions are only available to individuals. Businesses, such as corporations or partnerships, do not get exemptions. (Learn more about how bankruptcy exemptions work in Chapter 7 bankruptcy.)
The exemptions available to you depend on where you live. There are federal exemptions but all states have their own exemption laws as well. Some states allow you to choose whether to use the state exemptions or the federal bankruptcy exemptions. Others only allow you to use state exemptions. (Find the bankruptcy exemptions in your state.)
In your bankruptcy schedules, you must identify the property which you are claiming as exempt. In order to do this you:
- identify the property specifically, and
- include the basis for your right to claim it as exempt (this usually means citing to the state or federal exemption that applies to your property).
Common Exemptions for Checking Accounts
Some states allow you to keep a certain amount of cash when you file for bankruptcy -- you can use this type of exemption to protect funds in a checking account.
Many states also exempt certain types of funds (for example, wages or social security benefits) -- if the money in your checking account is from one of these exempt sources, you may be able to keep it. But not always. In some situations, money that would otherwise have been exempt loses it's exempt status once you deposit it into a bank account. It depends on the law in your jurisdiction.
Some common exemptions that might be available to you and that you might be able to use to protect money in your bank account include:
- cash on hand, up to a certain dollar amount
- personal property, up to a certain dollar amount
- wages (sometimes the amount is unlimited, and sometimes there is a cap)
- social security and other federal benefits
- pension or retirement funds
- child support or spousal support
- personal injury proceeds (check with an attorney)
- tenancy by the entireties property (in certain states), and
- wildcard exemption (allows you to choose any property to claim as exempt up to a certain dollar amount).
What If Your Account Is Not Exempt or Only Partially Exempt?
If you have money in a checking account that was not exempt when you filed for bankruptcy, that money is not yours to keep. If you can claim part of the money in the account as exempt, the non-exempt portion will need to be turned over to the bankruptcy trustee. But you can keep the exempt portion.
If a business files for bankruptcy, the trustee may contact the bank directly to close the account. But if you are an individual filing for bankruptcy, you will probably have to just pay the trustee an amount equal to the nonexempt funds in the account. The trustee will then use this money to repay your creditors. To make sure you do not leave yourself short, you should take steps to be sure that you will not have outstanding checks on the date you file for bankruptcy.
If You Owe Money to the Bank that Holds Your Accounts
If you owe money to the same bank that holds your accounts -- for example, you have a balance on a credit card with the same bank -- your bank may have the right to "set off" its debt. That means that if you file for Chapter 7 bankruptcy, your bank may have the right to use your bank balance to pay down your credit card debt.
Each state has its own laws on bank set-off. If you think you may have to file for bankruptcy, it's often safest to have your checking account at a bank that is different from the bank that you owe money to. Most banks allow you to keep your checking account if the bankruptcy does not affect the bank.