If you plan to file for bankruptcy, taking some steps ahead of time can make your case go more smoothly. In some circumstances, moving your money to another account, stopping automatic payments, and making sure you are current on utility payments will ensure that your money is where you need it during your bankruptcy.
(For more tips on what to do and not do before filing for bankruptcy, visit our Bankruptcy Planning topic area.)
The Automatic Stay
When you file for bankruptcy, the automatic stay goes into effect immediately. The automatic stay prevents most creditors from continuing with collection efforts against you. However, in some instances certain creditors can take money from one account to cover the debt you owe on another (called an offset) even after you've file for bankruptcy. And although creditors are supposed to put a stop to automatic payments or debits upon your bankruptcy filing, it doesn't always happen right away.
Avoid Bank Set Offs
Many people owe money to a bank in which they also have accounts with deposits. For example, you may have a savings and checking account with Bank A, and also have a credit card issued by Bank A and a car loan from Bank A. If you are in this situation and you file for bankruptcy, the bank cannot demand additional payments from you for the credit card or car loan debt. But it can use the balance that was in your account on the date that you filed for bankruptcy to pay down the debt you owed the bank on the date of the filing. This is called a set off.
If you are counting on using money that was in your account before you filed for bankruptcy, you should consider moving your funds to another bank before you file.
For more information, read Will I Lose My Checking or Savings Account When I File for Bankruptcy.
Beware of Utility Company Set Offs
Like bank accounts, security deposits held by utilities, such as electric, telephone, or gas companies, can be subject to set off if you owe money to the utility when you file for bankruptcy.
If you file for bankruptcy, the utility company cannot demand payment of past due amounts in order to continue utility service. However, if you are behind in utility payments when you file for bankruptcy, the company can use money from your security deposit to cover the debt. And then it can require you to replenish your deposit or, with certain limits, post a new deposit.
Before you file, be prepared to replenish your deposit in the case of set off. Consider timing your bankruptcy filing so that you aren't behind in utility payments when you file.
To learn more about utility deposits in bankruptcy, see Using Chapter 7 Bankruptcy to Prevent a Utility Shut-Off and If I File for Bankruptcy, Can I Get My Gas Service Reconnected?
Stop Automatic Payments Before You File
If you have authorized automatic debits to be made from your bank account or paycheck, or automatic charges to your credit card, these are not likely to stop on their own the instant you file for bankruptcy.
Once creditors receive notice of your bankruptcy filing, they are supposed to stop automatic debits or charges. But sometimes they don't. And sometimes when you request that automatic payments stop, it takes a while for that to happen. Even though you may get the debited funds back eventually, it's wise to stop automatic payments and debits well before you file for bankruptcy. This will make sure you aren't short on living expenses if you file for Chapter 7 bankruptcy, or that you cannot make your Chapter 13 plan payment.
This is particularly important if you have authorized a creditor to:
- debit your bank account for a debt that will be discharged
- collect money from your paycheck for a debt that will be discharged, or
- charge your credit card for ongoing services.
To learn more about stopping automatic debits, see Automatic Deductions: Watch Out for Errors.