Both the Federal Bankruptcy Code and Minnesota State law contains a number of provisions that protect the funds in a debtor’s bank account, along with other property from being taken to pay creditors. Property protected, under law, from creditors is considered “exempt.” In a chapter 13 bankruptcy.
You Won't Use Property or Funds in Chapter 13
In chapter 13, the debtor does not lose property so protecting the funds in a bank account is not an issue. However, in a chapter 7 bankruptcy, the debtor may lose property that is not exempt to be paid to their creditors. In the large majority of cases, most, if not all, of the debtor’s bank account funds are fully exempt under the law, but not always. That’s why it’s important to speak with an experienced bankruptcy attorney to determine whether your bank account funds are exempt and protected before filing for bankruptcy.
Banks Can Claim Non-Exempt Funds in Minnesota
Although a debtor’s bank account funds are usually exempt from creditors in a bankruptcy, a common concern is whether a bank has the right to directly take funds from the debtor’s account when the debtor owes the bank itself money (i.e. bank credit cards and loans). Banks, like other creditors, are not allowed to take funds that are exempt under the law. However, bankruptcy law permits banks to directly take any money that is not exempt from the debtor’s account to apply toward the debt owed to the bank. This is called a “setoff.”
While in a bankruptcy, banks are not allowed to simply take the money from the debtor’s account even if the money is not exempt. The debtor is completely protected by the “automatic stay” as soon as they file for bankruptcy, which makes it illegal for any creditor to attempt to collect a debt from the debtor without court permission. Therefore, the bank must file a motion requesting that the court “lift” the automatic stay and grant the bank permission to exercise its setoff right to take the funds while the debtor is in bankruptcy.
"Administrative Freeze" in Minnesota
However, the U.S. Supreme Court has held that banks are allowed to place a temporary “administrative freeze” on a debtor’s bank account. During this freeze, the debtor will be unable to access the funds in their account. The purpose of the freeze is to preserve the funds in the account pending the decision by the court whether to allow the bank to take the funds. There is no set amount of time that the bank is allowed to maintain the freeze of the account, but it cannot be for an unreasonably long time, typically not more than a few weeks.
If it is apparent that the funds are exempt, the bankruptcy trustee will usually get the bank to release the freeze upon request by the debtor. However, if there is a dispute as to whether the funds are actually exempt, the trustee may not agree to the funds being unfrozen and the court may need to resolve the matter.
Avoiding Bank Freezes/Setoffs in Minnesota During Bankruptcy
There are some practical ways to avoid bank freezes/setoffs and to ensure that the funds will be fully exempt from creditors in the first place. To avoid a set-off by the bank, the debtor can simply transfer funds into a different account at a new bank before filing for bankruptcy. So long as the debtor does not have any existing debt with the new bank, the bank will not freeze their account or take any money. There is nothing wrong with doing this so long as all bank accounts are listed in the debtor’s bankruptcy petition.
How To Spend Down Your Money Before Filing Bankruptcy in MN
To ensure that the funds in the bank will be fully exempt, the debtor may also simply spend down the money in the account before filing for bankruptcy. The less money that is in the bank account before filing, the more likely it will be exempt and protected from creditors. However, the debtor should be careful about how they spend the money. They are permitted to spend the money on necessities such as food, regular bills and car repairs. They are not allowed to spend lots of money on luxury purchases such as vacations, expensive stereo systems and Super Bowl tickets, for example.
In chapter 13, debtors are also not allowed to make large payments on regular bills (i.e. mortgage or rent payments) before filing for bankruptcy. If the debtor spends down money on things that are not needed, the debtor may be forced to surrender the purchased property or pay the money back so that it may end up going to creditors instead.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT KAIN & SCOTT
You should always discuss these matters with an experienced bankruptcy attorney before filing for bankruptcy. See us at kainscott.com.
