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Offsets in Bankruptcy: When Your Bank Pays Itself First

Generally a bankruptcy stops collection action immediately (the "automatic stay" of Sec. 362 of the Code), and the debtor's assets become assets of his bankruptcy estate, unless they are exempt. For many Alaskan debtors, especially those without home equity, all the assets will be exempt. So you'd expect that your bank account would be safe, right? Not always!

Banks regularly assert the right to "offset" deposits they hold against debts that a bankruptcy debtor owes to them. Thus, if you have $2,000 in a checking account at Wells Fargo, and you also have a Wells Fargo Visa account that has a balance due of $4500, you can expect that your checking account will be frozen (you will not be able to access those funds on deposit) when you file bankruptcy. Bankruptcy law is clear that they are allowed to do this, and to keep the money, too. 11 U.S.C. Sec. 553; see Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995)("freezing" the account does not violate the automatic stay).

The answer is that you must open a new bank account, at some bank where you have no debt, before you file your bankruptcy case. This can be a problem, because often our pay is direct deposited into one bank and there will be a delay to change it. However, the risk is real; if you don't take care of this, you could lose money on deposit.

Don't close the old account; you should keep it open for your own convenience at least until the bankruptcy case is closed. You may find it a problem to open a new bank account while the bankruptcy is pending.

At the Law Offices of H. Frank Cahill, in Anchorage, we represent clients throughout Alaska, including, Wasilla, Dillingham, Palmer, Valley, Kenai, Fairbanks, Kodiak, Seward, Soldotna, Homer, Juneau, Wrangell, Petersburg, Bethel, Nome and Sitka; in Fairbanks-Northstar Borough, North Slope Borough, Northwest Arctic Borough and Bristol Bay Borough; and across the Kenai Peninsula. 

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.