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What Is a Bank ‘Setoff’ and How Do They Affect Bankruptcy?

Among the many steps I recommend taking before filing bankruptcy, two of them were looking at your bank’s policies in case they freeze accounts, and considering changing banks. Another reason debtors should consider these courses of action, especially before bankruptcy, is “setoffs.” What are these, and how do they intersect with New York bankruptcy?

When debtors deposit money in bank accounts they’re lending their funds to banks. Frequently, debtors also borrow money at the same banks because it’s convenient, but it’s also convenient for the banks, specifically when debtors fail to make their loan payments on time. Banks can simply take the money from the debtors’ other accounts to satisfy their debts. This is a “setoff.” So you may be asking whether banks are certain to do this before filing bankruptcy, but the answer is: “It depends.” There are some limitations to setoffs.

One limitation is that federally chartered banks can’t set off credit-card debts without prior authorization by the debtor, which can appear in the original consumer credit agreement. State-chartered banks aren’t covered by this law. Another more important limitation is that banks can’t set off certain exempt funds: Social Security payments, disability payments, or unemployment benefits.

So debtors who fall behind on their debt payments might be subject to banks’ offsets. The easiest way to avoid this, especially if you are considering bankruptcy, is to move your money to a different bank. But can a bank set off a debt after bankruptcy?

The practical answer is no. Once debtors file bankruptcy the automatic stay bars most offsets. In fact section 553 of the Bankruptcy Code cites the automatic stay as an exception to its rule favoring them. However, because the law does allows offsets, banks can ask the bankruptcy court for relief from the automatic stay to offset the debt. The likelihood that they would do so is very low, thankfully, because any assets debtors have belong to the bankruptcy estate for the benefit of all the creditors. Consequently a bankruptcy court is unlikely to grant the motion unless the creditor can offer compelling reasons for it.

As stated above, debtors who both borrow and lend with the same bank would be wise to move their deposits to a different bank, both to avoid setoffs and possible account freezes, if the bank does that too. If you are experiencing serious financial difficulties, then talking to an experienced New York bankruptcy lawyer can advise you on how to prepare for the filing.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA
718-855-6840
http://nybankruptcy.net/

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