How to Use Your Bank Account During Filing of Chapter 13 Bankruptcy

When considering declaring bankruptcy, you must carefully monitor your use of your bank account for at least 90 days before filing your petition in bankruptcy court. A court-appointed bankruptcy trustee will review your spending habits prior to and during the bankruptcy process.

Filing a Chapter 13, or "wage earner" petition, gives you a bit more flexibility than a Chapter 7 asset liquidation action. Since you are willing to repay your debts on a reduced basis in Chapter 13 versus asking the court to wipe them all away, as you would in Chapter 7, you enjoy a bit more bank-account freedom.

Safeguard Your Cash

Be aware that your bank may use its right of "setoff" to freeze or take your cash if you owe it money. Once you file for bankruptcy, your bank is another one of your creditors and should not take your balance in payment of a loan. However, some banks may still freeze your account, leaving the bankruptcy court to parcel out your money.

If you owe the bank that holds your account a loan, you can protect yourself by opening a new account at another institution. This ensures that you have cash to use for necessities during the bankruptcy.

Keep All Receipts

While you should always keep purchase receipts for income tax purposes, in the 90 days before your filing and during the bankruptcy process, it is imperative that you keep evidence of all purchases. The court and/or the appointed trustee will want to review these if they suspect you made some unnecessary purchases prior to or during the bankruptcy process. Keeping receipts will effectively display that you used your bank account for reasonable and necessary purposes.

Have Your Bank Statements Ready

Copies of your monthly bank statements prior to your bankruptcy filing must be submitted with your petition. During the bankruptcy process, you may be asked to submit additional bank statements to verify that you are continuing to control your spending. Should there be questions about abnormal or large withdrawals, your purchase receipts should be evidence that any transactions in question are reasonable and legitimate.

Track Your Deposits

While bankruptcy court is most concerned with your spending habits, they may also ask about "unusual" deposits that occur before and during your case. Should you have any one-time or unexpected deposits during this period, be prepared to explain and define their source. Hopefully, there are good reasons for these deposits (and they won't be recurring), as they could change your financial profile in your original bankruptcy petition.

Consider the Risks

Should the bankruptcy court believe that you misled them or misrepresented your true financial position, the judge may impose sanctions on you or even dismiss your case. A dismissal will also result in a potentially dangerous court-ordered waiting period before you can refile a bankruptcy petition. In this period, you no longer enjoy the protection from creditor actions offered by bankruptcy. Home foreclosure, auto repossession or creditor lawsuits may proceed against you if your bankruptcy petition is dismissed.

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