If you are preparing to file a bankruptcy case, you will find us reminding you that you must ensure your bank account balances are low. I know that is a “easy” matter for most people – most clients will tell me that any day after pay day is a low balance day because the paycheck comes in and then the bill paying drains that bank account almost immediately. The reason for this is because there are limited exemptions to protect cash or bank balances on the date of filing and if you have high bank balances, they are subject to seizure by the bankruptcy trustee to pay your unsecured creditors.
That said, be careful about having a negative bank balance on the date of filing. I have not seen what I’m about to describe happen before but it happened to my clients a month ago. Typically, when clients inadvertently have a negative bank balance in an otherwise active checking account on the date of filing, the bank will offset the negative balance against the next deposit.
But for this set of clients, on the date of filing, they had a modest negative balance of about $70. They didn’t know they were going to be negative so the bank (a large bank) was not listed as a creditor and they were otherwise planning on making good on the negative balance and continuing to bank with that same bank. The bank evidently had a great monitoring system because it knew my clients filed bankruptcy, and when my clients had a paycheck deposit two days after filing, the bank froze the account. The bank froze the account instead of taking the conventional route of using the deposit to offset the negative $70 overdraft.
The bank’s practice and rationale have legal basis and are blessed by the US Supreme Court. But that bank’s practice that day of freezing my clients’ account is rare. It’s rationale was that it did not want to be seen as violating the clients’ automatic stay (a filer’s right upon filing to STOP all collection efforts from creditors) by taking a $70 offset. So instead, it froze the account and allowed withdrawal of the full deposit a couple of business days after that paycheck was deposited. The bank’s two day “swift” return is acceptable in the eyes of the law.
Is a two day delay in having a deposit made available to you an acceptable delay? I didn’t think so. Moral of the story – don’t count on the usual if you have a negative balance with a bank on the date of filing. Put another way, don’t have a negative bank balance on the date of filing.
A brief note about credit unions – unlike my warning above with banks, it is a different story with credit unions. It is quite common to see credit unions freeze clients’ bank accounts if the credit union is also a creditor in the bankruptcy. For example, you bank with ABC Credit Union but also owe the credit union on a line of credit for $5,000. It is not unusual for the credit union to freeze your account and you have to go the branch to release the funds to you directly. The majority of the credit unions allows business as usual with you BUT many do choose to not extend new services to you if you caused them a loss on an account you listed in your bankruptcy.
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By Karen Maxcy, W M Law Attorney
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