Setoffs? Offsets? Account Freezes? What to do with Bank Accounts If you are Filing Bankruptcy

bank accountsOne of the things we always tell our clients is that if you have money in a bank account and you owe money on a loan to that bank, then you need to move that money elsewhere before you file bankruptcy. Why? Because if you don’t, then the bank will take all the money you have in that account, even though you have filed bankruptcy!

But how can they do that? Doesn’t the bankruptcy stay automatically stop all collection attempts? For the most part, yes. But there is a small loophole for creditors that hold your checking and savings accounts. We have grown accustomed to thinking of our money in a bank account as solid, safe. As safe as, say “money in the bank.” But ‘your’ money in your checking account is not really money. It is not cash sitting in a vault somewhere. It is a debt owed to you by the bank. You give them money when you make a deposit, and they promise to give you that money whenever you ask for it. So if you have money in the bank, it is not your money, but the bank’s money and the bank just owes you a debt. Now normally, this situation is fine, even if you are in bankruptcy. But if you owe a debt to the same bank, then you have a situation where you owe a debt to someone who owes a debt to you.

This is called a “setoff.” And a setoff is a lot like what is sounds like: if A owes money to B and B owes money to A, then they each have the right to set off their debts against each other.  EVEN IN BANKRUPTCY! So if you owe Regions Bank $2500 on a loan, and you have $1000 in your checking account when you file bankruptcy, Regions can freeze that money – keeping you from withdrawing it or even honoring checks against that account. Your checking account will be sapped down to $0.00, and your debt to them will only be $1,500. It is only fair, if you think about it, but it still can be very painful to deal with when you were counting on that $1,000 to feed your kids.

So what do we do? As I always tell my clients: Move the Money! If you have money that you are worried about, move it to another bank. Withdraw it and deal in cash for a while. The bank can’t come and get it from your clenched fist! So don’t be stupid and be proactive.

Also, you don’t always owe who you think you owe. You may have a Regions bank checking account and a Regions VISA Card, but the VISA card may not actually be owed to Regions.  A lot of banks have their names on credit cards, but as soon as you open the credit card, they sell the account to another bank, like GE Money Bank.

And debts owed to corporate relatives are not the same. For instance, a car note owed to Wells Fargo Auto Finance, Inc. is not subject to a setoff by Wells Fargo Bank of Alabama.  They are two separate corporations and therefore they are not liable for each others’ debts or credits