Filing for bankruptcy can feel overwhelming, and it’s natural to have concerns about your finances if you’re contemplating this kind of debt relief. You may be asking, “Is my bank account going to be safe if I file for bankruptcy?”
The answer to this question depends on a few important considerations, including the type of bankruptcy you file, how much money is in your account and whether you owe money to the bank itself.
Treatment of bank accounts in personal bankruptcy matters
When you file for bankruptcy, whether under Chapter 7 or Chapter 13, an automatic stay goes into effect immediately. This court order stops creditors from collecting debts or seizing assets, including funds in your bank account. However, this doesn’t mean your money is fully protected without exception.
Although it is statistically unlikely that this will happen, in a Chapter 7 bankruptcy scenario, a court-appointed trustee can take possession of your non-exempt assets to pay your creditors. Alabama law provides a list of exemptions that determine what property you can protect. The state’s exemptions for cash in a bank account are limited. In many cases, small amounts of money used to cover basic living expenses may be exempt, but larger balances could be at risk unless they fall under another protected category. For example, if your account contains recent wages, those may be protected up to a certain amount under Alabama’s wage exemption rules.
By contrast, if you file under Chapter 13, your bank account is typically safer. Chapter 13 is a reorganization plan that allows you to keep your assets while paying back a portion of your debts over time. You’ll remain in control of your finances, including your bank accounts, as long as you comply with your repayment plan.
It’s also important to consider the relationship between your bank and your debts. If you owe money to the same bank where you keep your checking or savings account—such as a personal loan or credit card—they may exercise a right called “setoff.” This allows them to withdraw money from your account to cover a missed payment, even before you file. Once bankruptcy is filed, the automatic stay prohibits new withdrawals for debt collection, but timing can be consequential.
To avoid surprises, it’s generally wise to seek personalized legal counsel before committing to a particular approach either way.