Is your bank account safe if you file for bankruptcy?

What the heck just happened?! Why did the bank just remove all the money that I had in my bank account and clean me out? Why did the bank just rob me is what you might be thinking? Well, the likely answer is because you probably owe the bank some money. The bank was probably exercising its right to a setoff, a right recognized in virtually all states in the United States.

This is what probably happened. You opened up a bank account at your local friendly credit union. Then, at some point, you took out a credit card with that same credit union that offered that unbelievable low rate. Finally, when it was time to finance a car, you once again turned to your credit union. Thereafter, at some point, you fell behind on your car or credit card payments, and so the nice credit union helped itself to the money that you had in your account.

Once you have defaulted on any of your loans the credit union does not need to sue you, they do not have to get court permission, and they certainly do not have to give you advance notice that they are about to help themselves to the money sitting in your account. And to add insult to injury, those outstanding checks that you wrote a few days prior to the bank robbing you (the bank exercising its right to a setoff if you want to get technical), those checks will undoubtedly bounce!

What can you do to prevent this from happening to you? It’s simple. The moment that you realize that you will be unable to make payments on a credit card, personal loan, mortgage payment, car loan, whatever, with the bank/credit union where you also have your checking and savings account, remove all money from those accounts and place them with a bank to whom you owe nothing to.

How about if you have not defaulted on any of your accounts with the bank? Well, in this case you have nothing to worry about, unless that is, you are about to file for bankruptcy. For instance, you want to file for bankruptcy because you have $20,000 in credit card debt with 5 different banks and none of those credit cards is owned by the credit union where you bank. The only ties that you have to your credit union is your bank account and a car loan for instance, which you have never missed a payment on and are current on the day you decide to file for bankruptcy. It does not matter. The moment that you filed bankruptcy you are deemed to have defaulted on your car loan and the bank has a right to “freeze your account.”

And if you thinking –as I am sure you are- what about the automatic stay? You know that powerful invisible shield that automatically activates the moment that you file a bankruptcy case and brings all attempts to collect money from the debtor to a grinding halt?! Well, in this case, not even that will save you. Don’t believe me, then check out the seminal Supreme Court Case of Citizens Bank of Marlyand v. Strumpf, decided in 1995 and see what happened to poor Mr. Strumpf. In that case, the Court made it clear, that the bank/credit union right to a setoff was more powerful than the usually invincible automatic stay. Granted, the bank initially could only “freeze the account” and then have to seek the court’s permission to actually remove that money from the account, but the end result will be one and the same…they get your money!

So once again, the easy solution, if you are contemplating bankruptcy, is to simply remove your money from the bank/credit union where you also have your mortgage, car loan, etc. and deposit that money elsewhere.

Oh, and finally, if you are wondering, what if my direct deposit check from my employer accidentally lands in the same bank account where I just cleared my money out of prior to filing for bankruptcy? The answer is post petition assets cannot be setoff. That would be an automatic stay violation. The bank cannot just take you post-petition money to satisfy a pre-petition debt. But, just because it can’t happen does not mean that it won’t happen. Heir on the side of caution and be sure that your pay checks are landing in the new bank account prior to filing for bankruptcy.

Do I Qualify for chapter 7 bankruptcy In Virginia?

Talk about not having any manners. You have barely sat down in my office, exchanged a few pleasantries, and then seemingly out of nowhere I ask you a very personal question: How much money do you make? Or more specifically, how much gross income have you been averaging per month for the past 6 months? Why would a bankruptcy attorney be asking you this question? Because one of the decisive factors in determining whether you qualify for a chapter 7 bankruptcy versus a chapter 13 bankruptcy is income.

You determine your income by first averaging your gross income for the past 6 months.  Then, multiply that number by 12 which will give you your median income for the year.

The next key question that I will ask you is how big is your household? Meaning, how many people live in your home. Why? Because as usual size does matter.  As in, the larger the number of people in your household the more income you are “permitted” to make and still qualify for a chapter 7 bankruptcy.

With these two key pieces of information I will then review Virginia’s state median income figures to determine where you stand. At this time (end of 2012) the figures in Virginia look as follows:

Household   Size

Income

1

$52,247.00

2

$64,593.00

3

$76,012.00

4

$89,803.00

5

$97,303.00

6

$104,803.00

What do these figures mean? It means that if you are below the median income figures as determined by your household size then you automatically qualify for a chapter 7 bankruptcy in Virginia. Conversely, if you are way above the median income figure for your household size, then in all likelihood you will only qualify for a chapter 13 bankruptcy.

Because I am fond of examples, let’s say that a husband and wife are thinking about filing for bankruptcy. They have a combined income of $75,000 per year.  They have one minor child which means that their household size is three.  Based on the chart above, either one of them –or both of them- would automatically qualify for chapter 7 bankruptcy.

As for those Virginia residents who make more than Virginia’s state median income as determined by their household size, in that case the Means Test will determine their fate. I will address the issue of “passing” the Means Test in a separate article.

So what’s with these figures and where do Virginia’s state median income figures come from?  Well, these numbers are the result of the Bankruptcy Abuse Protection and Consumer Reform Act passed by Congress in 2005.  After great pressure from the banking industry that was bemoaning the fact that people were abusing the bankruptcy laws and qualifying for bankruptcy far too easily, Congress finally caved in and passed this legislation. The main purpose of the new law was to take away the power of bankruptcy judges to make their own discretion in determining whether or not someone qualified for chapter 7 bankruptcy. Now –in theory at least- it is just a matter of dollar and cents.

And finally yes, your observation is correct, each state in the United States has its own state median figures that are adjusted slightly each year.  And for once, the fact that you live in Virginia is actually helpful. Congress, when it enacted the new law in 2005 understood that where you live is just as important as how much you make.  $50,000 in Northern Virginia is not going to take you as far, as say someone living in West Virginia.  Congress is essentially giving you credit for living in a more expensive area and adjusting its figures accordingly.

So yes, call it money, mullah, scratch, the green stuff, whatever…When it comes to bankruptcy, the saying is true “It’s all about the Benjamins.”