05 Sep Your bank may deduct your unsecured loan in bankruptcy
By Atty. Crispin Caday Lozano
Before you file bankruptcy, you may need to determine if you have a bank deposit and a credit card debt with the same bank because your deposit may be set off against your debt by the bank.
Question: May a bank set off (deduct) an unsecured debt against a debtors bank deposit with the same bank?
Answer: Yes, Section 553 of the Bankruptcy Code preserves the right of a creditor to offset mutual debts with the debtor under common or statutory law. There are exceptions to this right of set off.
Question: What are the exceptions and limitations in which a bank may set off a loan against your deposit?–––
Answer: Section 553 does not necessarily preserve an actual setoff, and a setoff effected within 90 days prior to a bankruptcy filing can potentially be recovered. Whether a prepetition setoff can be recovered depends on the “insufficiency” (that is, the amount by which the debt owed by the debtor exceeds the debt owed to the debtor) measured on the date of the setoff and compared to the insufficiency on the later of the date that is 90 days before the bankruptcy filing or the first date within that period that there is an insufficiency.
Question: May a creditor deduct a debtor’s credit card debt from his deposit after the filing of bankruptcy?
Answer: A creditor that offsets mutual debts runs a risk that the amount offset might be recovered from the creditor, in cash payable to the bankruptcy estate, if the debtor files bankruptcy at some time within 90 days after the setoff.
Question: What is an example of a set off while in bankruptcy?
Answer: Debbie owes Bank of Finance $1000 in credit card debts. Bank of Finance is the depository bank of Debbie where her salary is automatically deposited. Debbie filed for bankruptcy in September 1, 2013. She has at that time a credit card balance of $1000 and a deposit to her account in the amount of $1500 representing her salary. On September 2, 2013, the bank set off the credit card debt of $1000 from her deposit of $1500 that leaves her bank balance to become $500. Did Bank of Finance do the right thing?
Analysis: Bank of Finance has a limited right of set off under state law. Debbie has the right to file for bankruptcy and discharge the debt to Bank of Finance. Debbie has a right to exemptions under the bankruptcy code for her deposit. Here the right of the bank to set off is limited to a 90 day prior to filing of bankruptcy. Since the set off happened within 90 days of the filing of bankruptcy, Bank of Finance will have to refund the amount set off to the bankruptcy estate. The bank may not set off a debt if the debtor is in bankruptcy without filing a motion for relief from automatic stay.
Note: This is not a legal advice and you need to speak to an attorney. The Law Offices of Crispin C. Lozano has 19 years of experience in bankruptcy cases.
- Bankruptcy will actually improve your credit within one year because your unsecured debts are discharged. Although the bankruptcy will be in your records for 10 years, not filing bankruptcy will make your credit even worse until most of your debts are paid in full.
- If you are being sued by your creditors, most money judgment can be eliminated in bankruptcy.
- Collection actions continue and you can be sued if you are in debt settlement.
- Chapter 7 will eliminate all unsecured debts. If you are near retirement age, you must eliminate most of your debts.
- Bankruptcy will stop foreclosure actions. If your trustee sale date is 10 days before, you can still file for bankruptcy.
- If your salary is being garnished, you have a court case about debts or you are being harassed by creditors, bankruptcy can stop garnishment, court cases, harassing creditors and eliminate the debt.
- Bankruptcy is cheaper, faster and safer than debt settlement which has no guaranteed success.
- Preserve your health, eliminate stress and live a happy life by eliminating your debts which is the root of all problems.