Many bankruptcy debtors have very limited disposable funds in the form of liquid cash prior to their bankruptcy filing. What they have in their checking and/or savings account they need for daily living expenses and cannot afford to lose that money.
This is true even after the debtors bankruptcy filing, which temporarily prevents creditors from getting at those funds. The bankruptcy filing however is not a cure all, and many debtors still have trouble paying utility, mortgage and car payments that the debtor might still need to pay after the bankruptcy filing.
So how can debtors protect that precious money floating in the checking account? There are several key strategies they can take.
The first strategy seems obvious, but can sometimes trip up debtors. The strategy is simple- Do not bank where you owe money. If you owe money to the bank (perhaps it is a credit union with a cross collateralization agreement on a car or credit card, or a bank where you also have a mortgage in default), the bank might exercise its rights of a setoff prior to filing.
For an example of the damaging domino effects of a setoff, check out the story of this Atlanta couple.
Once the bankruptcy case has been filed, the bank cannot exercise its right to a setoff, because to do so would be a violation of the automatic stay. However, there is still some risk with banking where you owe money even after you have filed bankruptcy. Some banks have taken the approach that they can setoff the funds that were in the account at the time of filing, meaning if you have $1,000 in your account several weeks after filing, but had $659 at the time of filing, the bank might try to setoff $659 and leave the rest.
Additionally, there is case law that supports the banks right to place an administrative hold on the funds in the debtors bank account. In that scenario, the bank does not take the funds, but it does place a hold on the funds during the debtors bankruptcy case. This prevents the debtor from accessing the funds during the case, which can be devastating for a debtor who needs the funds immediately for living expenses.
So if you owe money where you bank, what is your best strategy? Open up a new account where you dont owe money. If you want to keep your account where you owe money, then only keep enough money in there that you can stand to lose. Hint- $10.
It is not enough to just pull money out of the account. Many debtors are set up with an automatic draft of their paycheck into their checking account. Therefore, if the draft is set to go into the account the debtor holds with a bank who he/she owes money, then the debtor must contact HR and stop that draft immediately and get a paper check.
Furthermore, many debtors have automatic payments set up through their checking accounts, or even worse, have allowed creditors access to their checking account to directly make the debits. It is a good idea to stop these payments in general, as it is never a good idea to allow someone access to your account; however, it is even more important in this scenario where the debtor has hopefully removed funds from his/her checking account and does not have the funds in that account to make those payments. Therefore, if the debtor does not stop the automatic payments, the debtor will bounce checks and incur late fees and penalties.
It should be noted that several banks have recently taken the dubious position that they can hold the funds of any bankruptcy debtor regardless of whether the debtor owes any funds to the bank. This position is likely to be challenged in court. Until such time as it is litigated or the banks change their position, if you have a Wachovia banking account and are filing bankruptcy, be aware that Wachovia might freeze your account during your bankruptcy whether you owe the bank money or not. Therefore, it would be wise for the debtor to remove all or nearly all funds prior to filing, as a preventative matter.