Time for a new bank account?

Warning!  If you owe your bank money and you file bankruptcy, you may find that your account has been frozen and that all the money in the account has been applied to the outstanding loan.

One of the very first questions I ask every potential client is whether they owe their bank money.  Very commonly a client will have a line of credit or overdraft protection linked to their checking account, and these are debts which must be listed on the bankruptcy schedules.  In fact, some banks are so watchful of new bankruptcy cases that they review every new case filed in the state on a daily basis and then automatically freeze the accounts of every customer who files bankruptcy. 

Bankruptcy Code Section 553 allows banks to "offset" any money in their possession on the day the bankruptcy case is filed against their debt.  The bank may only seize the money on deposit on the day the case is filed and they may not offset future deposits.

The Solution:

Take your money out of the bank you owe and open a new account somewhere else.  As a general rule, keep your loans and your banking separate.  Although it is convenient to keep all your loans and deposits in the same bank, this becomes disasterous when a bankruptcy case is file. 

Imagine the chaos of having a paycheck directly deposited into an account on the same day the bankruptcy is filed.  All those automatic payments are stopped, mortgage payments become late, NSF charges are assessed by the bank, you have absolutely no money at all until the next paycheck and your employer is scheduled to deposit your next paycheck that into a closed account.  I can't imagine a worse way to start the bankruptcy case.

Can I just pay the bank off before bankruptcy?

If you owe your bank a small amount (less than $600), you may decide it is easier to pay off the loan instead of switching banks.  However, if you owe more than $600 it is advisable to simply switch banks. 

Automatic Deposits & Payments.

If you are like me, you have set up several automatic deposits and payments in your bank account.  If you are switching to a new bank remember to give your payroll department the new account information and notify the creditors you have allowed to deduct payments out of your account of the new bank as well.