Before Filing Bankruptcy, Consider Changing Bank Accounts

23 Mar Before Filing Bankruptcy, Consider Changing Bank Accounts

There is a simple checklist of things that you need to prepare for filing for bankruptcy. The first is to change your bank account if you owe any money to the bank where your accounts are located. If you have a personal loan, a car loan, or even a credit card with that bank, it’s a good idea to close the account and open a new one at a place that you haven’t borrowed from. Or, if you don’t want to close the account, then open a new account to use, and don’t leave any more in the old account than you can afford to lose.

Banks and credit unions have the right to take the money in your account and apply it toward the money you owe them. Russ DeMott explains the bank’s right of set-off this way:

When you make a deposit with your friendly bank, you’re loaning it money. Most of us don’t think of it that way, but it’s true. You deposit money. They promise to give it back to you when you want it. Sometimes the bank pays you back without interest–like with most checking accounts. At other times, you actually get paid back with interest–like with a savings account, money market account, or certificate of deposit.

But it’s all the same. You’re loaning money to the bank. And if you have a loan and you don’t pay them back–you default, they’ll take the money from your account. You have what the law calls “mutual obligations.”

I know it’s a hassle to change bank accounts, and it means you’ll have to change any direct deposit, drafts, and deal with uncleared checks. But is that worse than, say, losing an entire paycheck? And just in case you’re thinking that you could just cash your check as soon as it hits the bank, forget about it. The bank holds all the cards–once they have decided to set off your account, you won’t be able to access the funds.

So, even if it is a hassle, and even if it is unlikely to happen, for most people it’s better to be safe. Pull out your most recent bank statement, look at the daily balances, and pick out the highest daily balance. Could you afford to lose that much? If not, change your accounts, and avoid the problem.

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Däna (pronounced "Donna") Wilkinson, has been a bankruptcy lawyer in South Carolina for 20 years. She is certified as a bankruptcy specialist by the South Carolina Supreme Court.
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