Can I Keep My Bank Account if I File Chapter 7?

Many individuals worry about losing access to their bank accounts when filing Chapter 7 bankruptcy. While a significant financial event, it is often possible to retain access to these accounts. The outcome depends on factors like the amount of funds, account type, and the debtor’s relationship with the bank.

Understanding Bank Account Status in Chapter 7

When a Chapter 7 bankruptcy petition is filed, banks may temporarily freeze accounts. This allows the bank to assess the situation and protect its interests, especially if the filer owes the bank money. While disruptive, this freeze is often a protective measure and not a permanent loss of funds.

The ability to keep funds in a bank account during Chapter 7 depends on bankruptcy exemptions. These exemptions, which can be federal or state-specific, protect a certain amount of cash or property from being liquidated by the bankruptcy trustee. If funds in a bank account fall within applicable exemption limits, they are protected.

A bankruptcy trustee oversees the case, identifying and liquidating non-exempt assets. Funds in bank accounts exceeding exemption limits are non-exempt and can be taken by the trustee to repay creditors. The trustee reviews bank statements and financial records to identify such funds.

Certain types of funds are inherently exempt, retaining their protected status even when deposited into a bank account. These include Social Security benefits, disability payments, unemployment benefits, and specific pension funds. To ensure these funds remain protected, keep them in a separate account, making it easier to trace their exempt source.

Practical Considerations for Your Bank Account

Managing bank accounts before filing Chapter 7 requires careful consideration. Large or unusual transactions, like transferring significant funds out of an account shortly before filing, can raise red flags for the bankruptcy trustee. Such transfers may be scrutinized as preferential transfers (payments to certain creditors within a specific period before bankruptcy) or fraudulent conveyances (transferring assets to avoid creditors).

A concern arises if a filer owes debt to the same bank where their account is held. Banks have a “set-off” right, allowing them to seize funds from a debtor’s account to cover outstanding debts like loans, credit cards, or overdrafts before bankruptcy discharge. To mitigate this, some individuals open an account at a different bank where they have no outstanding debts prior to filing.

Joint bank accounts require careful attention in bankruptcy proceedings. Even if only one account holder files for Chapter 7, the entire account may be at risk if the non-filing co-owner cannot clearly demonstrate their portion of the funds. If funds are commingled, it can be challenging to differentiate ownership, potentially exposing the entire balance to the bankruptcy estate.

Disclose all bank accounts and their balances fully and accurately in the bankruptcy petition. Failing to disclose any financial accounts, even those with minimal funds, can lead to serious complications, including dismissal or accusations of fraud. Transparency ensures a smoother bankruptcy experience.

After Chapter 7: Banking Forward

If a bank account was frozen upon bankruptcy filing, it should be unfrozen once the process is sufficiently advanced, particularly after the trustee determines there are no non-exempt funds. This occurs when the bank receives official notification from the trustee or court that the funds are exempt or not subject to liquidation. While this process can take time, the account should eventually become accessible.

Discharged debts can impact existing banking relationships, especially if the bank was a creditor in the bankruptcy. Some banks or credit unions may terminate an account if the debtor had outstanding obligations that were discharged. However, many major banks may continue to do business with clients even after a bankruptcy.

Opening new bank accounts post-bankruptcy is possible, though challenges may arise. Financial institutions use services like ChexSystems to review banking history, and a bankruptcy filing can appear on these reports. Individuals can explore “second-chance banking” options offered by some banks and credit unions, designed for those with past financial difficulties. Credit unions are a viable option, often taking a personalized approach. Prepaid cards can serve as a temporary solution for managing funds, though they do not help rebuild credit and may come with fees.