Will Declaring Bankruptcy Give the Court Access to My Bank Account?

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Will Declaring Bankruptcy Give the Court Access to My Bank Account?

While many people might assume you’re trying to do something wrong when you ask that question, usually it pops up in a bankruptcy case thanks to real, legitimate fears. After all, if a perfect stranger has access to your bank account, they might abuse the power, or do something that keeps you from buying food or paying your rent.

And while the full answer is complicated, the general answer is, “no, at least, not in the way you’re thinking.”

The court will not force you to close your bank account.

You are certainly allowed to keep your checking and savings account during a bankruptcy. You can certainly continue banking at the same institution, though in some cases you might not want to (see below).

And at no point should you wake up to some sort of surprise withdrawal from the court which takes all your grocery money. In fact, the automatic stay should stop other parties from doing the same, such as creditors who might be taking money out of your bank account in response to a judgement.

The court will ask for copies of all your bank statements.

The trustee will want to see copies of your bank statements. The cash on hand is an asset, and that matters. You will also report your approximate balances when you fill out your paperwork.

The trustee is entitled to audit your bank accounts. It may happen randomly, or it may happen because you’ve tipped off the trustee’s suspicions. If they think you’re committing any kind of fraud, you may expect them to take a closer look at your assets.

Do not try to hide bank accounts from the trustee because you’re afraid of what they’ll do with the information. This is a good way to get charged with bankruptcy fraud, a criminal charge which can lead to serious jail time, as well as steep fines.

The type of bankruptcy you’re filing determines what may happen next.

If you’re declaring Chapter 7 bankruptcy, the court may take some of your funds to pay off your creditors. Remember that some of your money will also be protected by exemptions. There are exempt amounts, and recent deposits from exempt sources. For example, the trustee can’t take your recent paycheck, or your social security check.

In a Chapter 13 bankruptcy, the trustee can freeze your bank accounts long enough to use some of the money to pay your creditors if that money is not exempt. That would happen at the beginning of the case. They can and often do release the claim if you need that money for necessity. In Chapter 13 you can expect some oversight, and you will have to report any sudden windfalls you receive. In general, though, once your Chapter 13 payment is set, it’s set, and as long as you’re making it nobody has any reason to come after your money.

Keep in mind there are legal ways to organize your assets in both cases which will allow you to protect as much property as possible. This is one of the most valuable services a bankruptcy attorney can provide for you.

Saving money may provide some pitfalls.

But not always. In a Chapter 7 bankruptcy, once you’re done, you’re done. While existing savings could be used to pay debts (see above), the discharge means you can do whatever you want with your money, including saving it.

In Chapter 13, saving money is a lot tougher. You might not be granted much of a budget to do so. In some cases it’s possible to get some leeway to place a small amount of money into an emergency fund every month. But, again, once you’re done, you’re done…and you’ll suddenly have several hundred dollars to save every month, money you’d been paying to the trustee. You’ll certainly be in a much better position.

The bank may do some things you need to be aware of.

If you have a car loan or credit card account with your bank you may want to switch your checking and savings over to a different institution before filing for bankruptcy. Otherwise, they may invoke their “set-off” rights, which were probably buried somewhere in your loan agreement. These rights would allow them to close your accounts and take the money in them to pay off loans you owe them in the event you file for bankruptcy.

Though certain judges have vehemently disagreed with the practice, Wells Fargo has a standing policy which directs them to freeze (not seize) customer bank accounts when they file for Chapter 7 bankruptcy, pending instructions from the court. Thus, if you bank with Wells Fargo it’s not a bad idea to switch banks before filing, just to reduce headaches.

The crux of the matter?

Ultimately, bankruptcy should not send you into a state of fear. If you work closely with a good lawyer and follow instructions, there’s no reason why you shouldn’t be able to access your money to meet your basic, day-to-day needs.

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