Impact on Money in a Checking Account when Chapter 7 Bankruptcy is Filed

The process for Chapter 7 bankruptcies after filing the request is fairly simple.  The court assigns a bankruptcy trustee.  This trustee is initially accountable for determining what your and your family’s financial condition is.  This is done using the bankruptcy law “means test”, Form 22a for Chapter 7 filings that the debtor must submit along with the filing papers.  The trustee must then hold what is known as the “341” meeting.  This meeting is held based on regulation 341, hence the name, where the trustee will ask the debtor questions about available assets and financial conditions based on the means test.  This session is held under oath.  Creditors are allowed to attend, and under the permission and oversight of the trustee, to also ask questions of the debtor.  The objective of the 341 session is to gather information about available assets and worth that the debtor has.  From this session, the trustee is required to identify assets such as checking and savings accounts that can be seized, wholly or in part, for the payment of the debtor’s creditors.  Such accounts are frozen by bankruptcy trustee order.

Now, focusing specifically on checking and savings accounts, mainly checking, the following conditions apply.  Federal law identifies what can be seized, under what conditions, and what cannot be seized, due to legal exemptions.  A well-defined list is available under Bankruptcy Law, Chapter 7 exemptions.  For instance, a person’s tax refund can be seized.  It is seized by, or turned over to, the trustee as it is deposited either into the checking or savings account of the debtor.  As a part of the means test, the trustee must identify a level of monies that the debtor has exempt from seizure to allow the healthy continuance of the debtor and, if applicable, family.  The trustee may require that the debtor open another checking account and transfer exempt monies into it for the family’s use, as the trustee allows.  A condition of this second account is that no direct deposits are allowed, and the account record is subject to trustee scrutiny as warranted.  This is not often done, but is a possible action.  Typically, the trustee will specify what monies in what amounts are to be made available to the trustee for creditor payment.  Once the trustee is finished with the account, the account may be closed by choice of the bank involved, or allowed to be used as normal by the debtor.  When the trustee freezes an account, the bank is now under the direction of the trustee and has set procedures to follow.

For exemption limits, each state has its own supplemental rules to the Federal law.  It is necessary to have a knowledgeable lawyer to help insure that the laws are correctly applied.

One point needs to be made.  A trustee is not obliged to take every asset immediately and pay off the creditor, even though that often happens.  Take again the point about a tax refund.  If the bankruptcy occurs before a tax filing occurs, and it is recognized that a reasonably substantial refund is expected, the trustee can lay claim to that refund or portion of that refund, even if it is months in the future.  When the money becomes available, it must be turned over to the trustee.

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