No, your bank will likely not close your checking or savings account if you file bankruptcy and you have only deposit accounts with them. This often confuses my clients because I warn them that all their credit cards will be closed within days of filing a bankruptcy. What accounts for this difference?
Why Do Banks Close My Credit Cards If I File Bankruptcy?
Within a week or so of filing bankruptcy, a debtor can expect all their credit cards to be closed by the issuing bank. There are several reasons for this. Banks are constantly scouring bankruptcy court records to see if any social security numbers associated with one of their credit cards has filed bankruptcy. It is generally difficult to find information about people filling bankruptcy, unless you have a lot of information about which of the 94 districts they filed in, or use Pacer, a fee-based centralized database. Credit card issuers have the incentive to vigilantly look for bankruptcy filings by customers because they want to cut their losses. They know any outstanding balance due on a card held by someone filing bankruptcy will be erased by the bankruptcy. After all, the card issuer effectively made an unsecured loan to the cardholder – at a very high interest rate, of course, but there was never a guarantee the card issuer would be repaid. If a debtor qualifies for a chapter 7 bankruptcy, then what’s owed by unsecured creditors will be discharged. Credit card issuers don’t want to throw good money (lend more money) after bad (the person is filing bankruptcy), so they immediately close credit cards. This is entirely legal, and should be entirely expected by anyone who files bankruptcy.
By the way, for people who have difficulty functioning without credit cards, the prepaid credit cards that act more like debit cards (you cannot charge more than you’ve pre-loaded onto the card) are good substitutes. Moreover, most of my bankruptcy clients report receiving offers for credit cards again within 6-12 months of filing bankruptcy. Bankruptcy doesn’t make it impossible to obtain credit in the near future, but it will make the credit more expensive: higher interest rates are charged to people who have bankruptcy on their credit score because of the somewhat higher risk of default.
Why Don’t Banks Close My Checking Account If I File Bankruptcy?
Unlike with credit cards, banks will not close checking, savings, brokerage, trading or other deposit accounts in response to a customer filing bankruptcy. That’s the case even if the person filing bankruptcy holds both a checking account and a credit card with the same bank: the credit card will be closed but not the checking account. There are several reasons for this. Bank are concerned with violating section 525 of the Bankruptcy Code, the Perez rule that broadly prohibits discrimination because of bankruptcy.
Also, a bank holding a person’s checking account isn’t a creditor of the customer: the bank isn’t lending the customer money, the way a credit card is (until the balance on the card is paid). Indeed, with deposit accounts, the bank is holding the client’s money and often charging a monthly fee to do so: no risk is posed by a bankruptcy to the bank (unless the same bank also has a loan product with the client).
Finally, most banks have no idea one of their customers filed bankruptcy, unless that customer also has a credit card issued by them or if the bank has a loan to that customer – in those cases, the bank is a creditor of person filing bankruptcy and may close or attach other accounts to satisfy a debt. However, banks providing only savings or checking accounts to a client are not notified of client bankruptcies because they are not creditors in these transactions, and only creditors receive Notice by the Bankruptcy Court of a person’s bankruptcy filing.
In short, credit cards are unsecured debt that will be erased in bankruptcy and thus banks can and will close those accounts if the cardholder files bankruptcy. Savings and checking accounts are services that are not impacted by a person’s bankruptcy, and thus banks neither know about nor close client’s deposit accounts in cases of client bankruptcy.