In chapter 7, bankruptcy, an individual’s assets are liquidated for payment to creditors. A few court-appointed trustees oversee the process and liquidate those assets. Those liquidation proceeds can then be divided among the Chapter 7 debtors and other unsecured creditors, such as credit card companies or medical bills. Any remaining funds remaining after all distributions have been made revert back to the Chapter 7 debtor, who would have received them in a Chapter 13 bankruptcy filing if he had filed one instead of chapter 7. Those funds would then be treated as the property of his estate, meaning they could potentially be transferred to heirs upon his death or another collateral event like divorce or remarriage.

What Happens to Your Bank Account When You File Chapter 7?

1. Creditors can freeze Bank Accounts

A Chapter 7 bankruptcy filing usually automatically places a hold on your bank accounts. A creditor or debt collector may not touch any money in your bank account until the bankruptcy case has been completed (or discharged, depending on how you want to look at it). However, there is an exception to this rule: if there is money in your account that came from another creditor (other than the creditors listed in the bankruptcy). That creditor has not been paid; its claim will be allowed to continue even if it means you lose access to those funds.

What Happens to Your Bank Account When You File Chapter 7?

2. Creditors can get Bankruptcy Trustees to sell a car or home

If you are late in making mortgage payments on your home or car, a creditor (or potentially a debt collection company) may ask the trustee to put up your property as collateral. The bankruptcy court will appoint a trustee to handle this process. Depending on the condition of your property, the trustee and the value of your collateral might get far apart after you file and the trustee has access to it. In that case, he can call in his note and still receive his fee.

3. Creditors can make you sell your house or car

Since a Chapter 7 bankruptcy is considered a liquidation of your assets, you may not be able to keep your house if you wish to preserve it as an asset in the future. The same may happen if you are considering filing for Chapter 7 to get out of a car loan or other debt. The creditor can call in the note against the collateral, and if you have no other options, you can be forced to sell your house or car.

4. Creditors can garnish your wages

After you file for bankruptcy, all of your debts are administered by a trustee who will find a way to pay off or discharge them. In some cases, however, that might not be enough to satisfy the creditors, and they may try to garnish your wages or place a lien on your bank account to collect. These are penalties known as “trustee’s liens” or “trustee’s levies.” In some jurisdictions, these liens or levies will stay on your record for ten years.

5. Creditors can sue you for less than they are owed

The trustee assigned to your bankruptcy case assumes that all of your debts have the same value and therefore liquidates all your assets to pay them off in full. If the trustee finds that the combined weight of your purchases is less than what the creditors are owed, he will return any difference to you as a distribution. This process is known as “piercing the veil.” The claimant (bankruptcy trustee) is not required to prove that the debtor’s assets are worth less than the debts they claim. If it turns out that they are not, the creditors may end up suing you for less than they are owed.

What Happens to Your Bank Account When You File Chapter 7?

6. Creditors can collect against your retirement benefits

If you have previously filed for bankruptcy, any debts you might have taken on shortly after that (the “fresh start” period) will be discharged and removed from your credit report. However, suppose you file for Chapter 7 after a previous bankruptcy has been terminated or disappears from your credit report. In that case, creditors may still be able to collect against your retirement benefits. Suppose a creditor or debt collector can successfully collect against your retirement benefits. In that case, all the money in those accounts will be seized and treated as income instead of an average retirement benefit. You may be forced to pay income tax on the charged amount.

7. Creditors can force you to pay a debt

Even if a creditor cannot do anything about the original debt through bankruptcy, they still have other ways of ensuring you will pay up on it. The trustee in charge of your case can ask for an “allowance” for certain debts, allowing them to continue operating normally and keep collecting payments from you until it is settled.

Final Verdict

Bankruptcy does not erase your past. Creditors are well aware of this and take advantage of this fact. If you have been struggling with debt for a while, there is no shame in seeking a bankruptcy lawyer’s advice. It is important to remember that filing for bankruptcy is not the end of the world either. Many people file for Chapter 7 and then sand again within ten years to clear away any lingering debts from the previous bankruptcy filing. These people must repay their original debt in total during their 10-year waiting period before filing again. Still, they can file without any worries about owing additional fees or penalties associated with previous filings.