Can You File Bankruptcy With Money in the Bank?

Filing for bankruptcy can provide financial relief, and it’s generally possible even with funds in bank accounts. However, the presence of these funds introduces specific considerations and rules for their treatment throughout the bankruptcy process. Understanding these regulations is important, as bank account balances are a significant factor in how a case proceeds and what assets may be retained.

Bank Accounts as Assets in Bankruptcy

When a bankruptcy petition is filed, all of a debtor’s assets, including funds held in bank accounts, become part of the bankruptcy estate. The treatment of these funds depends on the type of bankruptcy chapter filed. In a Chapter 7 bankruptcy, a trustee is appointed to sell non-exempt assets to repay creditors. Funds in bank accounts are subject to this process, and any non-exempt amounts can be seized by the trustee.

Chapter 13 bankruptcy involves a reorganization of debts through a repayment plan over three to five years. While debtors typically retain their assets in Chapter 13, the money in bank accounts is still considered when determining the feasibility and terms of the repayment plan. If a bank account contains significant funds, a portion may be required to be contributed toward the repayment plan, ensuring creditors receive at least as much as they would in a Chapter 7 liquidation. The amount of money held in bank accounts directly influences the bankruptcy process and its outcomes for the debtor.

Exemptions for Your Funds

Exemptions protect a debtor’s assets, including cash in bank accounts, during bankruptcy. These provisions allow individuals to keep certain property up to a specified value. Debtors can use either federal or state exemptions, but not both. The choice often depends on which set offers greater protection for a debtor’s assets.

Some states may offer a specific exemption for bank accounts, while others might include them under broader categories like personal property or cash on hand. If a state does not have a specific bank account exemption, a “wildcard” exemption can often be utilized to protect funds. A wildcard exemption is a versatile tool that can be applied to any type of property, including cash or bank balances, that might not be covered by other specific exemptions.

Under federal bankruptcy exemptions, the wildcard exemption is $1,675, plus up to $15,800 of any unused portion of the federal homestead exemption. If a debtor does not fully utilize their homestead exemption, the remaining amount can be added to the wildcard exemption to protect other assets, including money in the bank. The federal homestead exemption, which protects equity in a primary residence, is $31,575. If a debtor does not own a home or has minimal equity, this unused homestead exemption can increase the amount of cash or other personal property protected under the wildcard provision. If the funds in a bank account exceed the applicable exemption amount, the excess may be subject to seizure by the bankruptcy trustee to repay creditors.

Disclosure Requirements and Financial History

Bankruptcy requires complete and accurate disclosure of all financial assets, including every bank account and its current balance. Debtors must list all individual and joint accounts, even those with minimal or zero balances. Concealing funds or accounts can lead to severe consequences.

Bankruptcy trustees will scrutinize a debtor’s financial history to ensure full disclosure and to identify any problematic transactions. Trustees typically request bank statements for the most recent two to three months leading up to the bankruptcy filing. This review helps verify the reported bank account balance on the filing date, as well as income deposits and spending patterns. If unusual activity is noted, such as large withdrawals, sudden cash transfers, or unexplained deposits, the trustee may request statements going back further, sometimes up to six months or even two years.

The trustee also examines transactions for “look-back periods,” specific timeframes during which certain transfers are scrutinized. Payments to individual creditors exceeding $600 within 90 days before filing may be considered preferential transfers and recovered by the trustee. Transfers to insiders, such as friends or family, have a longer look-back period, typically one year. Fraudulent transfers, where assets are moved to avoid creditors, can have even longer look-back periods, sometimes extending up to four years or more. Failure to disclose assets or hiding funds can result in case dismissal, loss of debt discharge, and criminal penalties, including fines and imprisonment.

Practical Considerations for Your Bank Accounts

Managing bank accounts strategically before and during a bankruptcy filing is important. Avoid large or unusual cash withdrawals, transferring significant sums to friends or family, or paying off specific creditors preferentially in the months before filing. Such actions can raise red flags for the bankruptcy trustee and may lead to complications or a clawback of funds. Spending funds on necessary living expenses, such as rent, groceries, and utilities, is typically permissible, but documentation should be maintained.

Upon filing for bankruptcy, bank accounts may be temporarily frozen, particularly if the debtor owes money to the bank where the account is held. Banks may exercise a “right of setoff,” meaning they can take funds from a deposit account to cover a debt owed to them. While not all banks freeze accounts, some do so as a standard practice upon notification of a bankruptcy filing. If an account is frozen, debtors should immediately contact their bankruptcy attorney, who can work with the trustee to demonstrate that the funds are exempt and facilitate their release.

Ensure all outstanding checks have cleared before the filing date, as the trustee considers the balance on that day. If checks clear after filing, the recorded balance might appear higher than the actual spendable amount, potentially making more funds appear non-exempt. Consulting a qualified bankruptcy attorney is recommended for personalized advice on managing bank accounts and navigating complexities.