Your Personal Bank's Right to Set-Off

Before filing a petition under bankruptcy it is VERY IMPORTANT to know that all banks and credit unions have the right to "set-off" your bank account balances in the event you file for bankruptcy.

The right to "set-off" works like this: When you deposit money into your checking or savings account, the bank teller (or ATM machine) gives you a deposit receipt. Once the money is in the possession and control of the bank the money no longer belongs to you. You have "loaned" the money to the bank and your deposit receipt is a "promissory note" promising to pay you back upon demand. Now, if you owe money to your bank by way of a personal loan or a credit card while the bank simultaneously owes you money by virtue of your account balance, the act of filing bankruptcy becomes a default under your promise to pay what you owe the bank. Even if you are current on your debt to the bank, your bank will instantaneously freeze your account balance and set-off whatever is in there, up to and including the entire amount you owe on the day you file.

As you can imagine, it could be devastating to go through the process of filing a petition in bankruptcy only to discover that doing so stripped you of the only money you have moving forward. Therefore, if you owe money to the bank or credit union where you normally keep a checking and/or savings account and, especially if that bank or credit union is where your pay check is electronically deposited, it is VERY IMPORTANT to open a new account at a different institution that you do not owe money to and switch your payroll deposit to the new institution BEFORE FILING A PETITION IN BANKRUPTCY.

Information provided by Derrick B. Hager - Attorney at Law