Can I keep a checking account if I file for Chapter 7 bankruptcy?

You can probably keep your checking account in Chapter 7 bankruptcy if the funds are exempt and you don't owe money to the bank.

Most banks will let you keep a checking account open when you file for bankruptcy (check with the institution). However, whether you’ll be able to keep the funds in the checking account is a different question entirely. Whether you can keep the funds in your checking account when filing for Chapter 7 bankruptcy will depend on if you:

  • can claim the money in the account as exempt (meaning the trustee cannot take it), and
  • owe money to the bank holding your account (for example, you have a credit card with that bank).

Disclosing Your Checking Account Balance in Bankruptcy

When you file for bankruptcy, you must submit papers with the court that list everything you own (called the bankruptcy petition and schedules), including your bank account. 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. Even worse, you could find yourself facing a bankruptcy fraud charge.

Which Property Is Exempt in Bankruptcy?

Bankruptcy exemptions are laws that tell you which property you can exclude from your bankruptcy. If the property is exempt, you can keep it in a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you can keep nonexempt property (property that isn’t protected by an exemption), but you’ll have to pay an amount equal to the value of the nonexempt amount in your three- to five-year repayment plan.

The exemptions available to you depend on where you live. Each state has a set of exemptions. 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.

Exemptions aren’t automatic. In your bankruptcy schedules, you’ll identify the property which you are claiming as exempt.

Also, exemptions are available only to individuals. Businesses, such as corporations or partnerships, don’t get to claim exemptions. (Learn more about how bankruptcy exemptions work in Chapter 7 bankruptcy.)

Exempting Checking Account Funds

If you can claim the funds in your checking account as exempt, the Chapter 7 trustee assigned to your case won’t be able to use the money in your account to pay creditors. In Chapter 13 bankruptcy, you won’t have to pay creditors an equal amount through your three- to five-year plan.

Most states don’t have an exemption for money in a checking account or even cash. And, for those states that do, the amount is often small, for instance, it’s common for a cash exemption to be as little as $300. However, you might be able to use another exemption to protect some of your funds.

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
  • any personal property, up to a certain dollar amount (this is usually a wildcard exemption—see below)
  • 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).

When Account Funds Are Nonexempt or Partially Exempt

If you have nonexempt money in a checking account when you file for bankruptcy, that money will not be yours to keep. Nonexempt funds must be turned over to the bankruptcy trustee. The trustee will then use this money to repay your creditors.

Here are some other things to be aware of:

  • Account freezes. Some banks will freeze your account as soon as they find out about the bankruptcy. They do it to protect the assets for creditors. In most cases, you or your attorney can ask the bankruptcy trustee to contact the bank and release the freeze. The trustee will likely do so if you’re entitled to the funds.
  • Checks that haven’t cleared. The trustee will look at your bank balance on the day that you file your bankruptcy. If the balance is higher than you expected because all of your checks didn’t clear, don’t count on the trustee being sympathetic. You’ll have to turn over any nonexempt portion. To avoid this, make sure all checks have cleared before filing.
  • Business bankruptcy. If a business files for bankruptcy, the trustee might 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.

(Find out whether it makes sense for a business to file for bankruptcy in Small Business Bankruptcy.)

Owing Money to Your Bank: Credit Card Balances

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 will likely have the right to "set off" its debt. That means that if you file for Chapter 7 bankruptcy, your bank could use your bank balance to pay down your credit card debt.

Each state has 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.

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