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

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

Your bank will know that you've filed for Chapter 7 bankruptcy. When you file for bankruptcy, you must submit papers to the court called the bankruptcy petition and schedules. In your paperwork, you'll list everything you own, including your bank account.

You won't want to simply "forget" about the account and fail to include it. If you don't list it and the trustee finds out about it, you 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 face a bankruptcy fraud charge due to hiding a bankruptcy asset.

Problems You Might Encounter With the Bank After Filing for Chapter 7 Bankruptcy

If your account is in good standing and you don't owe the bank any money, the bank likely won't take action. But that's not always the case. Here are some problems that can occur when filing Chapter 7.

When the Bank Will Close a Checking Account After a Chapter 7 Filing

Most banks don't close a bank account in good standing after receiving notification of a bankruptcy filing. However, exceptions exist. For instance, credit unions tend to close accounts more often. Your local bankruptcy lawyer can explain the current trends in your area.

However, if your balance is overdrawn, expect the bank to close the account. In this case, you'll want to prepare by opening an account elsewhere before filing for Chapter 7. Why? Because many banks won't open an account for you shortly after a bankruptcy filing.

You can learn how to protect yourself before a Chapter 7 filing in Preparing for Bankruptcy: What to Do With Bank Accounts, Automatic Withdrawals, and Utility Deposits.

When a Bank Will Freeze Your Checking Account After Chapter 7

Many banks will freeze the money in your checking and savings accounts when they learn about bankruptcy. They do this to protect creditors' assets. You or your attorney can ask the Chapter 7 trustee assigned to your case to contact the bank and release the freeze.

The trustee will likely do so if you're entitled to the funds. The exemption sections below explain how to protect funds from the trustee.

When the Bank Will Take Your Money

If you owe money to the same bank that holds your accounts—for example, you have a balance on a credit card or vehicle loan with the same bank—your bank will likely have the right to "set off" its debt. If you file for Chapter 7 bankruptcy, your bank could use your 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, having your checking account at a bank different from the one you owe money to is often safest.

Keeping Checking Account Funds From the Bankruptcy Trustee

Even if you avoid problems with your bank, you stand a good chance of losing the money in your bank account in the Chapter 7 bankruptcy case itself. To prevent a loss, you'll need to understand how to protect property in bankruptcy with bankruptcy exemptions. Bankruptcy exemptions are laws that tell you which property you can keep when you file for bankruptcy.

What Can I Keep in Chapters 7 and 13?

If property, such as an account balance, is covered by an exemption and therefore exempt, you can keep it in a Chapter 7 bankruptcy. The Chapter 7 trustee sells nonexempt property you can't protect with an exemption and distributes the proceeds to creditors.

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. Learn more about how bankruptcy exemptions work in Chapter 7 bankruptcy.

In a Chapter 13 bankruptcy, you can keep exempt and nonexempt property. The Chapter 13 trustee doesn't sell property for the benefit of creditors. However, this ability comes at a cost. You must pay creditors at least an amount equal to the value of the nonexempt amount in your three—to five-year repayment plan. Learn about property in Chapter 13 bankruptcy.

How Do I Find Bankruptcy Exemptions?

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, while others only allow you to use state exemptions.

Listing Exemptions in Your Bankruptcy

Exemptions aren't automatic. In your bankruptcy schedules, you'll identify the property you claim as exempt. Exemptions are available only to individuals. Businesses like corporations or partnerships cannot claim exemptions. Learn more about small business bankruptcy.

Protecting Checking Account Funds in Bankruptcy With Exemptions

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).

Other Ways to Protect Bank Account Funds in Chapter 7 Bankruptcy

The simplest way to protect the money in your bank account is by spending it before you file for bankruptcy. However, you'll want to take a few precautions.

It's a good idea to use the money for necessities that are currently needed, like food, utility bills, rent, car repairs, clothing, and medical bills. However, only pay what you owe and purchase what you need. The trustee can recover overpayments fairly easily.

You'll want to keep track of your spending by retaining receipts. Also, be sure the funds are out of the account when you file. The trustee will ask for a copy of your bank statement, and you must exempt any amount shown. Having outstanding checks that hadn't yet cleared when you filed will not decrease the balance for the purposes of bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we want to ensure you find what you need. Below, you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.