Preparing for Bankruptcy: What to Do With Bank Accounts, Automatic Payments, and Utility Deposits

Plan for bankruptcy by ensuring you have a bank account that will survive bankruptcy, terminating automatic payments, and preparing for a utility deposit set off.

By , Attorney

You don't have extra money to lose when you're filing bankruptcy. So taking time for bankruptcy preplanning will be well worth the effort. Here are a few things you'll want to know:

  • how to avoid losing money in your bank account
  • when you might need to come up with a utility deposit, and
  • how to stop automatic payment withdrawals.


Avoid Losing Bank Account Funds or Access By Preparing for Bankruptcy

You likely already know that you can protect property with bankruptcy exemptions. However, protecting a bank account balance in bankruptcy isn't easy. Here are some common bank account problems you should know about:

  • Protecting the funds in your account. Most states don't have a bank account exemption, and if one exists, the amount it'll cover will be minimal—so check your state's exemptions. The bankruptcy trustee tasked with administering your case will look at your account balance on the filing date. You'll lose any amount over and above the exemption amount, even if you have outstanding checks or charges that haven't cleared.
  • Preparing for frozen funds. To preserve the assets for creditors, some banks will freeze your account as soon as they receive notice of your bankruptcy. If the funds are yours—for instance, the money is post-filing income—you or your attorney should contact the bankruptcy trustee. The trustee will instruct the bank to lift the freeze.

In both cases, avoiding the problem is simple. Make sure your balance is low by using your funds to pay necessary bills before filing for bankruptcy. As long as you keep records and spend on things you need, like food, car repairs, gas, and utilities, you shouldn't run into an issue with the bankruptcy trustee.

Avoid Losing Bank Account Funds to Set Off By Preparing for Bankruptcy

Many people do all of their banking at the same place, so it's not unusual to have credit cards, a car loan, and checking, savings, and investment accounts at the same bank.

Here's the problem—when you sign the loan contract for the credit card or vehicle loan, you agree to a set off—a contract provision allowing the bank to withdraw funds from your deposit account and apply the money to your loan balance. That can be problematic—and costly—when you file for bankruptcy.

Example. Suppose you have a credit card, car loan, and checking account with Bank A when you file for bankruptcy. Even though the bank can't demand further credit card and car loan payments, it can use its set-off rights to dip into your bank balance on the date you file for bankruptcy and use the money to pay down the credit card and car loan balances owed to the bank.

An easy way to avoid this problem? Do your banking somewhere other than where you owe money. Don't interpret this as suggesting that you should close an account and not report it on your bankruptcy paperwork or hide cash—you never want to do that.

What you'll want to do is open checking and savings accounts at a bank that doesn't service any of your debt and use the new account for banking purposes before filing bankruptcy. Again, you don't need to close other accounts—leave them open and report all accounts when filling out your bankruptcy paperwork.

You'll need the new account for another reason, too. After your bankruptcy filing, the creditor bank you owe money to will likely close your accounts. This can be problematic because many banks won't open a new account shortly after a bankruptcy filing. Your bank probably won't close it if your bank account isn't overdrawn and you don't owe any other debts. But that's not always the case, and you should be especially wary of credit unions.

Learn more about keeping a bank account in bankruptcy.

Avoid Utility Deposit Set Offs By Preparing for Bankruptcy

Before you file, be prepared to replenish your utility deposit if you have unpaid utility bills, or consider timing your bankruptcy filing so that you aren't behind on utility payments. Like bank accounts, security deposits held by utilities, such as electric, telephone, or gas companies, can be subject to set off if you owe the utility company money when you file for bankruptcy.

However, the utility company can't demand past due amounts to continue utility service because the debt gets wiped out in the bankruptcy case. However, if you're behind on utility payments when filing for bankruptcy, the utility company can use your security deposit to cover the utility debt. Then it can require you to replenish your utility deposit or post a new deposit (some limitations exist).

Learn more about utility deposits in bankruptcy in Using Chapter 7 Bankruptcy to Prevent a Utility Shut-Off.

Prepare for Bankruptcy By Stopping Automatic Payments Before Filing

One way to avoid being short on funds needed to pay living expenses is to stop automatic payments before filing for Chapter 7 or 13 bankruptcy, particularly if you've authorized a creditor to automatically:

  • debit your bank account or paycheck for a debt you'll discharge, or
  • charge your credit card for ongoing services.

Once creditors receive notice of your bankruptcy filing, automatic charges should stop. However, if you've authorized automatic deductions taken from your bank account, paycheck, or credit card, they won't stop as soon as you file for bankruptcy—your request can take a while to go through. Even though the automatic stay order prohibiting most collection efforts goes into effect immediately, it'll usually take a week before creditors receive the court's bankruptcy notice.

Learn more about stopping automatic deductions in Automatic Bank Payments: Watch Out for Errors.

How to Notify Creditors of Your Bankruptcy

If you can't stop payments before you file, you can speed up the process by notifying the creditor yourself. Fax or email a letter to the creditor with the bankruptcy case number, filing date, and the court where you filed—especially if you need to stop:

  • a pending or ongoing wage garnishment
  • an imminent foreclosure sale
  • a vehicle repossession, or
  • any other matter that would be difficult to unwind.

Your bankruptcy attorney will know how to take these steps on your behalf.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure 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 need anything else!

Providing all information needed to file for bankruptcy is beyond the scope of this article. If you'd like to file without an attorney, a self-help book like How to File Chapter 7 Bankruptcy by Attorney Cara O'Neill and Albin Renauer J.D. or Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Cara O'Neill (Nolo) can help you make well-informed decisions about your bankruptcy matter.

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