Are the deposits of money that I have in my checking account safe upon the filing of my bankruptcy?


                                                   COMMON LAW RIGHT OF SET-OFF

Oftentimes a person may have a deposit of money in their checking account at the time that they file bankruptcy. The question that arises is whether those monies are safe?  The Bankruptcy Code provides the bank with what is known as a set-off. A set-off is when a creditor, often a financial institution, retrieves the money from the debtor's account to pay a debt owed to that creditor by the debtor. The automatic stay that comes about upon the filing of bankruptcy prohibits the set-off of any debt owed by the debtor that arose prior to the commencement of the case in which a claim could be made against the debtor. Generally, creditors may not engage in any type of collection activity to coerce the payment of a prepetition debt. However, an exeception to the rule is that a freeze on a debtor's bank account, by a bank that a debtor owes money to, is not considered a set-off that is prohibited by the automatic stay. The catch is that it must be a temporary freeze. A temporary freeze is permitted to allow the creditor to obtain relief from stay in order to exercise its' right of set-off. A permanent freeze without seeking relief from stay would clearly be a violation of the provisions of the automatic stay.



Even though a bank or financial institution might have a right of set-off, there are certain situations in which that right may be limited, or even defeated:

1)  It has clearly been determined that if a debtor has a plan confirmed in their Chapter 13 Bankruptcy and provides for a different treatment of the claim, then any set-off or freeze is prohibited. For instance, a set-off by the IRS would be prohibited after the confirmation of a Chapter 13 plan that has provided for payment of the debt through the plan.

2)  A typical situation situation that alot of debtors find themselves in is: 1) One of their debts is from a credit card issued by a bank that they have deposits with. The bank is prohibited from setting off funds that the debtor may have deposited with the bank, or 2) A debtor may have a consumer line of credit with the bank. Likewise, the bank is prohibited from placing any freeze or set-off on any funds on deposit with the bank.

3)  Even though a debtor files bankruptcy, he or she is still considered to have an interest in any funds that are deposited in any account. The issue becomes whether the debtor's right to exempt those funds are superior to the bank's right of set-off. The bank is basically a general unsecured creditor, but it is subject to the debtor being able to exempt any funds that might be on deposit. However, the bank's right of set-off gives it a right that takes priority over any other creditor's claim to any funds on deposit. The majority view, which includes the Bankruptcy Court for the Western District of Pennsylvania, is that property which the debtor has been able to exempt, is not subject to set-off. Any funds that exceeds the amount that was able to be exempted may be set-off against the account.

4)  Any bank or financial institution is prohibited from setting off any debt by seizing Social Security Benefits.

5)  There is no right of set-off by the bank of any pre-petition debts against post-petition deposits in an account. Otherwords, only funds on deposit at the time of filing bankruptcy may be subject to being set-off. Any funds deposited after a bankruptcy is filed are safe and are not subject to set-off. 

6)  An exception to the automatic stay permits the IRS to set-off a pre-petition tax refund against a pre-petition tax debt. The exception is only for taxes that you owed prior to filing bankruptcy. Any tax refunds that become due postpetition are not subject to being set-off. For instance, if you are in a Chapter 13 Bankruptcy and become entitled to any tax refund for any of the years after your initial filing, then the IRS is prohibited from attaching those refunds.    

Prior to filing for bankrptcy, if a person faces circumstances that may subject their funds to being seized by the bank or a financial institution, then the best way to prevent the freeze or set-off is simply to deplete the account.

If you find yourself in a similar type of situation or have any other questions about filing for bankruptcy, then call Pittsburgh Bankruptcy Attorney Rodney Shepherd today at 412 471-9670 or fill out our online contact information form and schedule a free consultation.