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

Plan for bankruptcy by moving funds in bank accounts, terminating automatic payments, and preparing for a utility deposit set off.

Your creditors are supposed to stop taking money from your accounts when you file for bankruptcy, but it doesn't always work as smoothly as you'd expect. Why? 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. In this article, you'll learn how to avoid losing money unnecessarily.

Avoid Losing Money or Access to Your Account

You likely already know that you can protect property with bankruptcy exemptions. This includes the money in your bank accounts. However, here are some common problems you'll want to be aware of:

  • Protecting the funds in your account. Most states don't have a bank account exemption, and if one exists, the amount it'll protect will be minimal. (Check out 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 that haven't yet cashed.
  • Preparing for frozen funds. Some banks, to preserve the assets for creditors, 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, the avoiding the problem is simple—ensure your balance is low by using your funds to pay necessary bills before you file. As long as you keep records, you shouldn't run into an issue.

Avoid a Bank Set Off

Many people owe money to the institution where they have a checking, savings, or investment account. In such cases, when you signed the loan contract for the credit card or vehicle loan, you likely agreed to a set off—a contract provision that allows the bank to withdraw funds from your deposit account and apply the money to your loan balance.

Example. Suppose you have a credit card, a 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 it's set off rights to use the balance in your account on the date you filed for bankruptcy to pay down the debt you owe the bank.

An easy way to avoid this problem is to do your banking somewhere other than the bank you owe money to. (You'll report all accounts when you fill out your bankruptcy paperwork, of course.).

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 company when you file for bankruptcy.

If you file for bankruptcy, the utility company cannot demand payment of past due amounts 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 post a new deposit (some limitations exist).

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.)

Stop Automatic Payments Before Filing

Once creditors receive notice of your bankruptcy filing, they're supposed to stop automatic or charges. However, if you've authorized automatic deductions taken from your bank account, paycheck, or credit card, it's unlikely that they'll stop the instant you file for bankruptcy. And sometimes when you request that automatic payments stop, it takes a while for that to happen.

One way to make sure you aren't short on the funds you'll need to pay living expenses after filing for Chapter 7 or 13 bankruptcy, it's wise to stop automatic payments well before you file.

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 deductions, see Automatic Bank Payments: Watch Out for Errors.)

Notifying Creditors of the Bankruptcy

If you're unable to stop payments before you file, you can speed up the process by notifying an important creditor yourself. Just 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.

If you're represented, your bankruptcy attorney will know how to take these steps on your behalf.

(For more tips about preparing for bankruptcy, see Prebankruptcy Planning.)

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