BankruptcyLawyerHonolulu: Your bank can keep your money on deposit and watch out for Cross Collateralization clauses
Beware! Your bank or credit union in Hawaii can keep your money even after you file for bankruptcy
by Honolulu Attorney, Brian Kawamoto
If you have any monies on deposit (cds, savings and/or checking account) with a bank or a credit union and if you also have an auto loan, share draft loan, regular loan, including a credit card* and if there is a balance due on any of your loans, they can put a hold on your monies on account and later apply it towards your outstanding loan balances. This is called the "right of offset". Established law says that even AFTER a bankruptcy petition is filed, a bank has the right to offset amounts in an account owned by the debtor against loans the same debtor owes to the bank, with approval of the Bankruptcy Court after the creditor files a Motion for Relief from Automatic Stay. In addition to Bankruptcy Court approval, two other conditions must be met:
- The debt must be unconditionally fixed, due and owing before the debtor files the petition in bankruptcy; and
- At the time the bankruptcy petition is filed, the account and the debt to be offset must be in the same right and capacity.
These setoff rights are provided for in 11 U.S.C. Section 553(a) and will prevail over any exemptions that you may have claimed to those funds in your bankruptcy case. See also http://www.bankruptcylawnetwork.com/2009/09/23/banks-and-credit-unions-can-keep-money-when-bankruptcy-is-filed/ Ideally then you don't want too much money on deposit with a bank when you also have a loan with them that you are seeking to discharge in bankruptcy.
*If you credit card is "totally" unsecured, Regulation Z prohibits banks from offseting deposit with credit card balances. If however your bank has a court judgment against you or if your credit card is secured by funds on deposit, or if you authorized your bank to take payments from your account to pay the credit card bill, then the bank can hold and take your funds on deposit. So, if you want to be safe because you don't know what kind of a credit card you have, don't keep an account at the same bank. See http://www.ehow.com/info_7903108_can-nonpayment-credit-card-payments.html
CROSS COLLATERALIZATION CLAUSE: Also, if you have an auto loan and a credit card or any other unsecured loan with the same bank or credit union you must review all of your credit card and loan documents to see if your automobile is pledged as collateral for the credit card or unsecured loan, if so then this is called "cross collateralization", which means that you must pay off ALL of your loans with the bank or credit union if you want to get the title for your car. For example say your auto loan balance is $10,000 and your credit card balance with the same bank or FCU is $8,000. The car is worth only $9,000. If your loans are "cross collateralized" (and they usually are especially when dealilng with credit unions) then you must repay the bank or FCU $18,000 (the sum of the two loans) if you file for bankruptcy and want to keep the car under a reaffirmation agreement. If you are filing a Chapter 7, you can try to redeem the car (where you pay only what the car is worth), but a single payment is required for that and most debtors don’t have $10,000 cash in the bank just lying around or they wouldn’t have had to file bankruptcy to begin with. If you car was purchased more than 910 days ago you can "cram it down" to the value of $10,000 but you must then you must file a Chapter 13 instead.
How do you know if you have a cross collateral agreement? You need to carefully read all loan and line of credit agreements to see if there is a clause that states that the collateral or security being pledged or financed is secured by any and all other loans, lines of credit or obligations with that lender, if it is there, then all of your loans are "cross collateralized". So beware when taking out more than one loan with your lender (including credit cards). See also http://www.legalhelpers.com/bankruptcy-articles/credit-union-loans-article.html for further reading on this matter.
Date of Article: March 2011
Disclaimer - It is advised that you consult a bankruptcy attorney or lawyer in your state when dealing with your individual situation as the bankruptcy laws are very complex and the law does change from time to time, also every state has different laws, ruling and court decisions on bankruptcy matters.. Statements made here reflects the author's viewpoint for general reading purposes only and therefore should not be relied upon or considered as a legal opinion or legal advice for your own particular factual situation. Each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue.