What Happens to My Bank Accounts in Bankruptcy?

If you are thinking about filing bankruptcy, you may be worried about your bank accounts. You might wonder if the bank will freeze your money, close your account, or take your funds. These are normal fears. The good news is that for most people, your bank accounts are safe in bankruptcy. But there are a few things you need to know first.

This article will explain what happens to your money when you file, how North Carolina law protects your bank accounts, and the simple steps that can keep your money safe.

The Short Answer

In most cases, the money in your bank accounts is protected when you file bankruptcy. North Carolina has special rules called exemptions that shield your money. Filing bankruptcy does not automatically close your accounts or take your cash.

The main risk is when you owe money to the same bank that holds your account. That bank may try to take your money to pay itself back. We will explain how to avoid this problem below.

How Bankruptcy Affects Your Bank Accounts

When you file bankruptcy, almost everything you own becomes part of what the law calls your "bankruptcy estate." This includes the money in your checking and savings accounts.

That may sound scary, but it does not mean you lose your money. North Carolina law gives you exemptions. An exemption is a legal tool that protects your property so you can keep it. When your money is properly exempt, the bankruptcy trustee cannot take it.

Here is something important to understand. The amount of money in your account matters as of the day you file. This is called the petition date. The court looks at what you have on that exact day. That is why timing your filing is so important, and why working with an attorney helps.

North Carolina Exemptions That Protect Your Bank Accounts

North Carolina is what we call an "opt-out" state. This means you must use North Carolina's exemptions. You cannot use the federal bankruptcy exemptions. The good news is that North Carolina's exemptions work well for most people, and courts are supposed to read them in your favor.

There are two main exemptions that protect money in your bank account.

The 60-Day Earnings Exemption

North Carolina protects 60 days' worth of earned but unpaid wages. To use this exemption, the money in your account must be earnings, and you must have earned it within the last 60 days. You also generally need to be supporting your family.

There is no dollar limit on this exemption. But you may have to show the court that the money really came from your wages and was earned in that 60-day window. Money that came from other sources, or older earnings, cannot be protected this way.

The Wildcard Exemption

If you cannot use the 60-day earnings rule, we often use what is called the "wildcard" exemption. North Carolina gives each person up to $5,000 in wildcard protection. You can use this on almost any kind of personal property, including the cash in your bank accounts.

The wildcard is flexible, but it is also limited. You only get so much. That is why it is important to work with your attorney. We help you decide the smartest way to use your wildcard so it protects what matters most to you.

The Biggest Risk: Bank Set-Off

The most common danger to your bank account is something called a "set-off."

A set-off happens when you owe money to the same bank that holds your account. Many banks put a rule in their contract that lets them take money from your account to pay a debt you owe them. They can do this without asking you first.

Here is an example. Say you have a checking account at a bank. You also have a credit card or a loan with that same bank, and you are behind on payments. That bank may reach into your checking account and take your money to cover what you owe.

A set-off can happen before, during, or after you file bankruptcy. This is why we give every client the same simple advice.

Be Careful With Credit Unions

We almost never see a regular bank close someone's account just because they filed bankruptcy. But credit unions can be different.

Some credit unions will freeze or close your account if you file bankruptcy, especially if you owe them money. Credit unions often tie all your accounts and loans together. If you have a loan with a credit union and you file bankruptcy, they may shut down your savings and checking accounts too.

If you bank with a credit union, talk to your attorney before you file. There may be steps you can take to protect your money.

Simple Steps to Protect Your Money Before You File

The best way to protect your bank accounts is to plan ahead. Here are the steps we usually recommend.

1. Open a new account at a bank you do not owe. Before you file, open a checking or savings account at a bank where you have no loans, no credit cards, and no debt. This keeps your money away from any set-off.

2. Move your funds to the safe account. Move your money out of accounts at banks where you owe a debt that will be wiped out in bankruptcy.

3. Keep the new account open. Do not close your new account until after your bankruptcy is finished. You will need it for direct deposits and bill payments.

4. Watch your balance on the day you file. Remember, the court looks at what you have on the petition date. Your attorney can help you time things correctly.

5. Tell your attorney everything. Share all your accounts, balances, and any debts you owe to your bank. The more we know, the better we can protect you.

Why open a new account early? Some banks will not let you open an account for a while after you file bankruptcy. Setting one up first means you always have a safe place for your paycheck and your money.

Chapter 7 vs. Chapter 13 and Your Bank Accounts

The way your bank accounts are treated is similar in both chapters, but there are a few differences worth knowing. You can read more about the differences between Chapter 7 and Chapter 13 bankruptcy on our website.

Not sure which chapter fits your life? Our guide on Chapter 7 vs. Chapter 13 can help, and you can also visit our page on whether you need bankruptcy.

What Should You Do Next?

If you are worried about your bank accounts, take a deep breath. For most people, this is a problem we can solve with good planning. Here is where to start.

• Make a list of all your accounts and balances.
• Note which banks you owe money to.
• Open a new account at a bank where you owe nothing.
• Talk to a bankruptcy attorney before you move any money or file anything.

A short conversation with an attorney can save you a lot of stress and help you avoid simple mistakes.

Talk to Duncan Law

If you are dealing with debt in North Carolina, you do not have to figure this out alone. Duncan Law can review your accounts, explain your exemptions, and help you decide whether Chapter 7 or Chapter 13 bankruptcy makes sense for you.

You can book a free consultation online, or call the office closest to you:

• Greensboro: (336) 856-1234
• Charlotte: (704) 563-1224
• Winston-Salem: (336) 245-4294
• Asheville: (828) 348-5252
• High Point: (336) 294-5800
• Salisbury: (704) 297-4000

Duncan Law serves clients in Greensboro, Charlotte, Winston-Salem, Asheville, High Point, Salisbury, and communities throughout North Carolina. You can also learn more on our bankruptcy FAQ page or contact us with your questions.