I have an account at a bank I owe money – What should I do? What if the bank makes a set-off?

19 Mar I have an account at a bank I owe money – What should I do? What if the bank makes a set-off?

People frequently bank at the same bank where they borrow, either personally or for their business. When they are thinking about bankruptcy, this is dangerous.

Banks or other creditors have the right to set-off debts they have against you against money you have on deposit at their bank. This means that the bank can take money out of your account and apply it to your debt with that bank. They really can do that. And they don’t need to file a lawsuit against you either. It can happen overnight when you are not even looking.

When you are a happy customer and the bank is a happy bank, this is not going to happen. But when your business is in trouble, your bank might not be so happy with you, especially if you personally guaranteed your debt to the bank.

If you are thinking about filing a bankruptcy case, either for your business or personally, and you have money on deposit at a bank to which you owe money, it would be a good idea to open a new account someplace else and move your money.

You’ll still have to disclose all transactions and transfers on any bankruptcy petition you might file. However, you might have a fighting chance to keep some or all of the money in your account depending upon the nature and extent of exemptions to which you might be entitled in your state.

In some instances, if the set-off is within 90 days of your bankruptcy, we have a chance to undo that set-off and recover the money for you. Your trustee in bankruptcy would have to decide that this is not an asset he wants to administer. Ask your lawyer to see whether section 522(h) of the bankruptcy code applies in your case.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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