Should You Close Your Bank Account Before Filing For Bankruptcy? | Whittier, CA Lawyer Explains

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Law Offices of Nicholas Gebelt
15150 Hornell St
Whittier, CA 90604
(562) 777-9159

Well, it's a very simple question to ask, but it's a little bit more complicated to answer. First, it depends on the chapter under which you file. If you file under Chapter 11 of the bankruptcy code, there is the requirement that you close all of your bank accounts, and then you have to open up new bank accounts called Debtor in Possession accounts. The cheques also have to say Debtor in Possession on them. It’s because each month you're going to be submitting a monthly operating report to the court and the office of the United States Trustee, so that the Office of the United States Trustee can monitor your use of funds. The reason for that is because prior to filing the bankruptcy case, you have assets and debts. The assets go into a bankruptcy estate when you file that petition, and the debts become claims against the assets in the bankruptcy estate. So as a Chapter 11 debtor, you'll become a quasi-trustee called the Debtor in Possession over the content of that bankruptcy estate and you have to manage it with a fiduciary responsibility. So the office of the US Trustee wants to be able to monitor you to make sure that you're running the estate in a responsible fashion.
On the other hand, let's say you do a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, generally, you do not have to close the bank account, if you don't want to. However, sometimes it's a good idea. I can only speak to the way things are here in California, and more generally, in the Ninth Circuit. If you bank with one of two banks, Wells Fargo or a Union Bank, it's generally a good idea. At the very least, if you do a Chapter 7 bankruptcy to drain the account. You don't have to close the account, but it's a good idea to drain the account. The reason for that is after you file a Chapter 7 petition, those banks will freeze your account. So the money in the account will be unavailable to you, in some cases, for as much as a couple of months. The bank won't take a dime out of the account, but you won't have access to the funds.
The rationale that they give is, we don't know if the money in this account is exempt or non-exempt. If we give the debtor access to the funds, and the Chapter 7 trustee comes to us and says, “Give me the money in that account. It belongs to the bankruptcy estate” we're left holding the bag. So we're keeping the account closed or at least frozen for the good graces of the Chapter 7 trustee. I suppose I sound like a bit of a cynic, but I don't really believe that's what's at work here. The reason I don't is, because the other banks don't do this. I have never had a case where a Chapter 7 trustee demanded that the bank disgorge the money that was in it. So whatever is going on behind closed doors at those two banks, is something with which I'm not privy, but they will freeze those accounts. So if you have an account with one of those two banks, and you file a Chapter 7. It's probably a good idea, at the very least, to drain the account and set up your automatic deposit with some other bank rather than those two banks.
In Chapter 11, yes, you must close the accounts and then open up Debtor in Possession accounts.

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