How Will Bankruptcy Affect Your Bank Account?

When someone decides to file for bankruptcy in New York, one of the first things they wonder about is their bank account. Will they be allowed to keep the funds they have there? Or is the account just another asset that needs to be itemized and liquidated by the bankruptcy trustee? It is a complex question, and it is important to understand the ins and outs of the applicable bankruptcy law going forward so you can be prepared.

Federal and State Bankruptcy Exemptions

The first thing to be aware of is that there are no specific exemptions for bank accounts, but they will often fit admirably under wildcard or general exemptions. In New York, however, a difficult choice sometimes must be made. New York is one of the states that allow debtors to choose between using federal and state bankruptcy exemptions. If you choose the state exemptions, you can only use the wildcard exemption for your bank account in lieu of the homestead exemption. If you own real property, you may be forced to make a choice. Under the federal exemptions, however, you may use $1,225 plus $11,500 of any unused portion of your homestead exemption.

New York is, however, one of the states that allow you to keep income earned right before your filing – up to 90% of it, or 100% if you are a non-commissioned member of the U.S. Army. Also, you may claim up to $600 if it is on deposit with a savings and loan institution. However, if you do not have enough exemption room to cover all the money in your bank account, it will be turned over to the trustee. All non-exempt assets, even liquid cash, must be turned over to the trustee in order to comply fully with the U.S. Bankruptcy Code.

Issues With Banks

Another way a Chapter 7 filing can affect your bank accounts is if you owe a debt to the bank which holds them – for example, a mortgage or credit line. If you do, the bank is within its rights to “set off” your debt – to hold some or all of your funds in order to pay the debt. In some states, no notice whatsoever is required, but in New York, the debtor must be given notice of the bank’s intent to exercise the right of set-off at least on the day before the action. Also, a bank may not set off a debt with funds from a Social Security or supplemental income account.

Another issue that can be very frightening is that some banks, such as Wells Fargo, will freeze the accounts of debtors after they file for bankruptcy, whether or not they owe money to the bank. This arguably violates the automatic stay (which is nearly always granted in Chapter 7 cases, against nearly all creditors), and indeed, the Bankruptcy Appellate Panel for the Ninth Circuit held in 2010 that it did. However, as of this writing, the Second Circuit has not decided whether or not to side with the Ninth, so the possibility of having your accounts frozen is still possible in New York. If it does happen, you must petition the trustee to have them unfrozen, which will usually happen if no money is owed to that bank.

Contact A Bankruptcy Attorney

If you need assistance dealing with the bankruptcy trustee or the Court, we can help. The Law Offices of Stephen B. Kass, P.C. boasts experienced attorneys that will work hard for you. Contact us for a consultation today.

Table of Contents

Contact Us

Featured Blog Posts

What is IRS? IRS Tax and Audit Guide: Role of Internal Revenue Service in Enforcing Federal Tax Laws. Contact the IRS for Federal Tax Return, Form W-9 and More.

Introduction to What is IRS (Internal Revenue Service) The Internal Revenue Service (IRS) is a critical agency within the United States responsible for administering and enforcing the federal tax laws for the United States government. It plays a pivotal role in funding essential public services and supporting the nation’s economic

Read More »

Where is my New York State tax refund?

Introduction When tax season comes to a close, many New Yorkers eagerly anticipate receiving their state tax refunds. It’s a well-deserved reward for diligent taxpayers, providing a financial boost that can be used for various purposes. In this article, we will explore the ins and outs of the New York

Read More »

Miami Florida Tax Articles

Florida Tax Guide: Is Social Security Taxed in Florida? Federal Tax Benefits of Retiring in the State of Florida 2023

Florida Tax Guide: Is Social Security Taxed in Florida? Federal Tax Benefits of Retiring in the State of Florida 2023

Social Security benefits serve as a vital source of income for many retirees. As individuals near their golden years, understanding the nuances of Social Security taxation becomes crucial. In this

September 11, 2023
Florida Tax Information for Taxpayers and Tax Professionals: Do I Need to File State Income Taxes in Florida? Role of Florida Department of Revenue

Florida Tax Information for Taxpayers and Tax Professionals: Do I Need to File State Income Taxes in Florida? Role of Florida Department of Revenue

Are you a resident of the Sunshine State wondering about your state tax obligations? Understanding whether you need to file state taxes in Florida is essential to ensure compliance with

August 28, 2023
Florida State Tax Rate 2023: Is There An Income Tax in Florida? Everything You Need To Know About Florida Tax. Florida Income Tax Calculator

Florida State Tax Rate 2023: Is There An Income Tax in Florida? Everything You Need To Know About Florida Tax. Florida Income Tax Calculator

In a world where state income taxes are the norm, Florida stands out as a haven for residents seeking a reprieve from this financial burden. The Sunshine State has gained

August 18, 2023

Have More Questions?

If you have not found the Tax & Accounting answers you are looking for, feel free to search here and browse our article catalog!