Bank Accounts: Some Things to Consider When Filing Personal Bankruptcy

by Craig Andresen, Minneapolis, MN, Bankruptcy Attorney

April 24, 2008

When filing a personal chapter 7 or chapter 13 bankruptcy, most debtors are concerned about the effect the bankruptcy filing might have on their checking and savings accounts. After all, many debtors have banked at the same institution for years, and they do not want to have this banking relationship disrupted. This concern, while understandable, should probably be replaced by a strategy designed both to avoid a financial loss, as well as to maximize the psychological benefit of the “fresh start” the bankruptcy will provide.

Even if a bank balance of a few hundred dollars can be exempted in the case, it may be wise to avoid “using up” the available exemptions on a bank account balance which easily could have been completely spent prior to filing. By fully depleting all bank accounts as of the time of filing the case, if some other asset turns out to have a market value in excess of what the bankruptcy schedules originally showed, the exemptions will not have been unnecessarily used on the bank account balance. This way, more of the exemptions will be available for the other asset involved.

Also, banks have a right of setoff of a debt owed to the bank against the debtor’s bank account balance, to the extent the account had funds in it on the date the bankruptcy was filed. This means the bank (if it is a creditor) will take any money out of the account on the day the bankruptcy is filed, with possibly disastrous results if checks are outstanding. The simplest way to address this problem is to open a new account at a bank to which the debtor owes no money, and to fully deplete the funds on deposit with the debtor’s former bank, before filing the bankruptcy.

This approach also addresses the debtor’s desire to continue using a credit card, or debit card, issued to the debtor by a bank to which the debtor owes money. The debtor should simply destroy the cards issued by such a bank, as they will no longer be needed. Instead, the debtor should use the checking account debit card issued to him or her by the new bank. Furthermore, it is well known that most debtors are solicited for new credit cards either during or shortly after a bankruptcy. If a bankruptcy debtor feels he or she absolutely must have a credit card, in addition to a checking account debit card as outlined above, at least a new credit card from a new bank will not have a pre-bankruptcy balance owed.

Opening a new bank account also allows a debtor to more fully recognize that he or she really has obtained a “fresh start,” complete with a new bank account containing no ties to the unpleasant past. A debtor might obtain a psychological boost from the cessation of statements from a bank that was a creditor, or from a bank where the debtor’s old accounts were the subject of financial distress.

Now that the debtor has a new bank account, it will be a simple matter for him or her to start using Quicken, Microsoft Money, or some other financial computer software to track household income and expenses. Knowledge is power, and just knowing on a day-to-day basis where the money is being spent will go a long way toward enhancing a debtor’s sense of financial well-being, and helping the debtor effectively manage his or her finances after filing the case. After all, that was the whole point of filing the bankruptcy in the first place.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.

Last modified: April 28, 2008