WHAT HAPPENS TO YOUR BANK ACCOUNT IN A BANKRUPTCY?
People contemplating a bankruptcy filing often have bank accounts that may have been pledged as collateral to secure a loan with the bank where the deposited funds are located.
If you are in such a situation, then you should consult with a bankruptcy lawyer regarding your legal rights.
Even if the funds are not pledged as collateral you must be aware of the legal concept known as setoff (also known as “offset”).
The right of setoff allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A.
The landmark decision discussing this right is Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995).
The Bankruptcy Code does not create a specific right of setoff allowing for a creditor to offset what it is owed with funds that are held in a bank account by the creditor.
However, Section 553(a) of the Bankruptcy Code preserves in bankruptcy the rights of setoff which otherwise exist.
Banks are not automatically allowed to offset what they are owed with funds on deposit. A determination has to be made as to whether the depositor has consented to such an offset in a written agreement.
If there is such a written agreement, then the agreement must be analyzed to determine if it complies with the requirements of the law.
As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation. Bankruptcy, as many other areas of the law, can be very case or fact specific. I pride myself on giving you the answers to your questions that are based on your individual circumstances.