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.