Bank Accounts and Bankruptcy

If you have money in an account at an institution to which you owe money, for instance money owed to the bank on a loan or a credit card, it is likely that the institution has the right to take your money on deposit and apply it to your debt to them. This is because you probably signed some sort of agreement when getting the credit card or taking out the loan expressly giving them the right to do this. This is one of those sneaky clauses that shows up in the pages upon pages of small print put before you to sign.

Thus, if you file bankruptcy owing a bundle on your Big Bank credit card, and you also have an account holding money at Big Bank, Big Bank can take the contents of your checking/savings account at Big Bank on the day you file to pay the credit card bill. So, it is wise to not have your assets in institutions to which you owe money. This is simply good practice in life in general.

Although the right of set-off should not apply to funds deposited after the bankruptcy case is filed, the chances for snafus are ever present. Better safe than embroiled in telling (and maybe having to prove) a bank that they violated the law. Be pro-active about this kind of thing, don’t let these banks get any more from you than they have already.

I advise clients to open up a new bank account before they file and then move their cash and automatic deposit instructions to this new bank.

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