If you are filing for bankruptcy under Chapter 7, you probably can expect to keep your checking account with a bank. If you owe a debt to the bank, however, the bank may have the right to take some of the funds from your account as a set off for the debt. This might arise if you hold a credit card through the bank. Also, you can keep the funds in the checking account only to the extent that they can be covered by exemptions under state or federal bankruptcy laws. Declaring the funds as exempt means that the bankruptcy trustee cannot take them and distribute them to creditors.
You will need to include any checking accounts that you currently own in your initial filing for a Chapter 7 bankruptcy. Failing to disclose the existence of an account can result in severe consequences if it is later detected, including the loss of the money and possibly even a criminal charge.
Exemptions for Funds in Checking Accounts
Usually, there is no specific exemption to cover money in a checking account or other types of cash. A few states do provide a small cash exemption for a few hundred dollars. This does not mean that you cannot protect the money in the account, however, since it may fall within a different type of exemption. For example, a “wildcard exemption” may allow you to protect any type of personal property up to a certain amount in value.
Sometimes the source of the money in the checking account may allow you to claim an exemption. If it comes from government benefits, such as Social Security benefits, or if it comes from a pension or retirement fund, child or spousal support, or a personal injury lawsuit, you may be able to claim a specific exemption for that type of cash. Many states also allow a debtor to claim an exemption for wages, although this may be limited to a certain amount. If the funds in the account were held in a tenancy by the entirety, this also may fall within an exemption in some states.
Non-Exempt Funds in Checking Accounts
On the other hand, if the money in a checking account does not qualify for any type of exemption, you will need to turn it over to the bankruptcy trustee. It will be used to repay creditors. Sometimes only part of the money in a checking account is exempt, while the rest must be submitted to the trustee.
An individual filing for bankruptcy under Chapter 7 may face an account freeze by a bank. You can let the bankruptcy trustee know about the freeze and ask them to get the bank to release the freeze. The purpose of the freeze is to hold the assets in the checking account for creditors to collect on debts, so the freeze should be released if you can show that the funds are covered or partially covered by an exemption.
You should try to make sure that any checks that you write from a checking account have cleared before you file for bankruptcy. This is because the bankruptcy trustee will check the balance in the account on the day of the filing. If some checks have not yet cleared, the balance may be higher than the amount that you stated to the trustee. This means that the surplus likely will be non-exempt and should be submitted for payment to creditors.