Monday, February 14, 2011

Bank Accounts & Bankruptcy

Learn what I did about choosing a bankruptcy lawyer here, or skip ahead to find out about Bankruptcy and Paypal.
Are you worried about what will happen to your bank account during bankruptcy? I was. It was a major concern of mine before I filed so I thought that you too might like to know about bank accounts and bankruptcy.

My personal bank accounts were with my employer's credit union. My checking account was overdrawn due to overdraft fees and I had two delinquent personal loans with this financial institution as well. I hadn't been able to make payments on the loans for several months.

The loans were going to be included in my bankruptcy petition but I wanted to bring my checking account current so I could continue to use it...I was attached to my credit union despite the threatening letters I had been receiving regarding my overdue loans. My attorney told me not to bother.

He said that the checking account could also be included in the bankruptcy and it was possible that the bank could use something called cross-collateralization, to freeze the bank account. That meant that they could essentially freeze direct deposit funds from my employer, leaving me nothing to live on.

An example of cross-collateralization is when a debtor has a checking account and a loan at the same bank. The debtor becomes past due on the loan and then the financial institution takes money out of the bank account or freezes the account until the loan becomes current.

The practice of freezing bank accounts due to past due loans is most commonly used by credit unions but other banks can do it. Going one step further, it is currently being reported that Wells Fargo/Wacovia is freezing the bank accounts of individuals who file bankruptcy, even if they don't have any debt with them and despite a court order deeming the practice illegal. That's scary stuff.

My bankruptcy attorney suggested changing bank accounts before the bankruptcy petition was filed, I wasn't able to close the accounts because of the negative balance but I did immediately stop my direct deposits and I opened new bank accounts at a local bank to whom I owed nothing. I could have also opened an online bank account. I know people who have successfully opened a bank account online for the same reason.

Had I not opened a new bank account prior to filing bankruptcy, it would have been very difficult to do so. Traditional banks do not check your credit report, but often they do use something called ChexSystems (or Chex Systems) or a similar company to check your banking history.

If you have outstanding (unpaid for) checks or an overdrawn checking account that has not been resolved, your bank will probably report you to ChexSystems and ChexSystems will report that information to banks that request it for up to five years.

So what do you do if you didn't open up a new account before bankruptcy? Is there a "bankruptcy bank" or are there "bank accounts for bankrupts" out there? Yes. There are second chance bank accounts. Second chance checking accounts, also known as Fresh Start bank accounts, can often be found online.

Don't be afraid of banking online. More and more people are banking on line (regardless of whether or not they have filed bankruptcy). Online bank accounts are sometimes easier to get and online banking is safer than it ever has been. You just need to remember to never sign into your account from an email.

That's the skinny on bank accounts and bankruptcy. As always, I wish you all success with your fresh start!

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