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 University of the Pacific McGeorge School of Law
Updated 2/09/2024

If you're wondering whether the bankruptcy trustee appointed to your case will look at your bank account after you file for bankruptcy, the answer is yes. Turning over your bank statements is a part of the bankruptcy process.

The trustee will evaluate if you have money to pay creditors, verify your income for qualification purposes, and check whether your actual and claimed expenses match. But you can lose money from bank accounts in other ways when filing bankruptcy, so taking time for bankruptcy preplanning will be well worth the effort.

In this article, you'll learn 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. For more tips to help you breeze through bankruptcy, check out the resources at the end of the article.

Losing Bank Account Access Before Bankruptcy

You likely already know that you can protect property with bankruptcy exemptions. However, saving a bank account balance from creditors 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 administering your case will determine 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. Some banks will freeze your account to preserve the money for creditors when 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. Ensure 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.

When a Bank Will Pay a Loan With Bank Account Funds

Many people do all of their banking at the same bank, so having credit cards, a car loan, and checking, savings, and investment accounts at one institution is not unusual.

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 when 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.

You'll want to 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, which can be problematic because many banks won't open a new bank account shortly after a bankruptcy filing. Your bank probably won't close it if your 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 bankruptcy. However, suppose you're behind on utility payments when filing for bankruptcy. In that case, 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 by reading 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, suppose you've authorized automatic deductions taken from your bank account, paycheck, or credit card. In that case, they won't stop as soon as you file for bankruptcy, and your request can take a while to go through. Even though the automatic stay order prohibiting most collection efforts goes into effect immediately, it usually takes 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 personally. 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 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!

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Helpful Bankruptcy Sites

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United States Courts Bankruptcy Forms

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.

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