What If I Owe My Bank Money?
Filing bankruptcy does not stop your finances. You still need money for gas, food, to pay the rent, etc. But what if you have money in your checking or savings account at a bank where you owe money? This can be a problem once you file your bankruptcy case.
What the Bank Can Do
If you have a debt at a bank where you have money deposited, the bank has a right of setoff. That means it can take money from your checking or savings account to pay a debt, like an overdraft or a defaulted loan. When you file bankruptcy, the bank’s right to setoff survives, but is temporarily prevented by the automatic stay. Before the bank can perform the setoff it must ask permission from the bankruptcy court.
You would think that the bankruptcy automatic stay would stop the bank from taking collection action against you, but that is wrong. The 1995 US Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 US 16 (1995) says that a bank can freeze your account and withhold your funds so that it has time to make a request for setoff from the bankruptcy court. Once your account is frozen for setoff purposes, the money is likely gone for good.
How Long Do You Have?
When you file bankruptcy the clerk of the court sends a notice to the bank regarding your bankruptcy case. It usually takes a few days for the bank to receive notice. However, some larger banks compare the list of recent bankruptcy filings against their accounts. If an account holder has filed bankruptcy, some banks will freeze the account immediately, whether you owe it money or not (Wells Fargo Bank often does this).
What You Can Do
The answer is simple. If you owe money to your bank, switch banks. Keep the old bank account open, but only keep a small balance. Remember to change any direct deposit to the new bank account and cancel any monthly direct debits. Your old bank cannot setoff money that is deposited in another bank, and cannot freeze that account.
Filing bankruptcy is complicated. Thankfully there are experienced attorneys that can identify your debt issues and are able to use the federal and state laws to protect your interests. If you need help with your finances, speak with an experienced bankruptcy attorney and discuss your situation. The federal bankruptcy code can help you discharge debt, restructure your finances, and get a fresh start.