Filing for bankruptcy is often a decision fraught with angst and uncertainty. Debtors are sometimes concerned about their bank accounts and whether they will be frozen, effectively cutting them off from money they so desperately need. While it is true that assets, including money, may be seized to pay off your debts, whether your bank account will be frozen depends largely on what type of bankruptcy you file and whether the funds can be exempted under federal or state law.
Chapter 7 Vs. Chpater 13
Individuals who choose to file for bankruptcy commonly file under either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. In Chapter 7 bankruptcy, debtors surrender non-exempt assets to a bankruptcy trustee who then sells those assets to repay the filer's debts. Any debts that remain unpaid at the end of the process are discharged and the filer is no longer responsible for them. In a Chapter 13 bankruptcy, the debtor is not required to surrender any assets, but rather enters into a repayment plan that lasts for three to five years. At the conclusion of the plan, any remaining unpaid debts are discharged by the bankruptcy court. Thus, asset seizure doesn't typically occur in Chapter 13 cases.
Cash Is an Asset
When a debtor files for Chapter 7 bankruptcy, he must disclose his income, assets, expenses and debts on the bankruptcy petition. Any cash the debtor has on hand, including funds held in a bank account, is considered an asset of his bankruptcy estate (property that the debtor owns or has an interest in at the time of filing). As a result, he must also list the total amount of cash he has, including bank account numbers and available balances in each account. The bankruptcy trustee assigned to your case may also ask about your accounts during a subsequent meeting to discuss your finances, known as a 341 meeting, that takes place a few weeks after you file for bankruptcy.
Once the bankruptcy trustee has determined your total assets and debts, she will then determine which assets can be seized to pay your creditors, aiming to pay as much of your debt as possible. The Bankruptcy Code permits debtors to exempt certain assets from seizure, meaning the bankruptcy trustee cannot take this property from you to pay your debts. To qualify for this protection, the asset must fall under a category that is exempt under either federal or state law. For example, federal law allows individual debtors to exempt their residence up to $21,625 in value or a car up to $3,450 in value. States provide similar exemptions. For example, in California, a debtor may exempt his residence up to $75,000 in value and a car up to $4,800 in value. Some states allow debtors to choose either the federal or state exemptions while others require debtors to use only state exemptions. Debtors who want to protect their bank accounts usually choose the federal or state "wildcard" exemption, which allows the debtor to protect anything he wants up to a set value.
If you are unable to protect your bank account with an exemption, the bankruptcy trustee is likely to freeze your account and use the money to pay your debts. However, the trustee may abandon or release her claim to these funds even when they don't qualify for an exemption, enabling you to keep this money. This commonly occurs when a debtor needs the funds to cover his reasonable living expenses, such as rent and food.