Closed Financial Accounts

Bankruptcy filers must disclose a wide range of information about their finances when submitting their bankruptcy petition. This includes information about current financial accounts and recently closed accounts. The Bankruptcy Court reviews this information to make sure the debtor has no assets that could be used to pay their creditors. The look back at recently closed accounts assures that nothing is being hidden from creditors, either. So, what does this requirement entail?

The bankruptcy petition "Statement of Financial Affairs" asks filers to list, "within 1 year before you filed for bankruptcy, any financial accounts or instruments held in your name, or for your benefit... (that) were sold, closed, moved, or transferred." This includes, "checking, savings, money markets, certificates of deposit, shares in banks, credit unions, brokerage houses, pension funds, cooperatives, associations, and other financial institutions."

Whew! English translation? "Tell us about any bank accounts or retirement funds you closed in the year before filing." Simple enough? Yes, and no.

I'll start with the most important of closed financial accounts, and finish with the simple situations. It is very important to disclose with detail any retirement accounts closed in the last year. This includes pensions, 401(k)'s, 403(b)'s, and IRA. Closed retirement accounts are important because they can involve lots of money, and the bankruptcy court and trustee will want proof that this money was not used to pay back preferential creditors, such as friends, family, and business insiders.

Closed retirement accounts are also important because they could be considered "income" for means test purposes. I won't go into the means test in too much detail, as it is discussed elsewhere on my website, but it suffices to say that a recently closed financial account within 6 months could affect your ability to file a Chapter 7 bankruptcy. This would count as income during that period. You will need to provide the court with the date the retirement account was closed, the amount withdrawn, and possibly with information on how the money was used.

You will also need to make sure your bankruptcy petition is consistent. If you withdrew $20,000 two months ago, but in your list of personal property (Schedule B) you do not account for where this money went, it could be a big problem. Consistency and accuracy are very important in filing.

If you have simply closed a checking or savings account, or a money market or credit union account, you will need to provide the same information. There is usually a simple explanation for closing accounts of these types. Sometimes they are accruing fees while not being used. Or, the money in the account was needed to pay bills. Disclosure should be made for complete accuracy, but the court is unlikely to inquire aggressively.

As I often tell my clients, if you tell the complete truth in your petition and testimony, there will be no issues in your case. Disclosing your closed financial accounts is a part of this process. The Court simply needs to verify recently closed accounts to make sure they were not dispersed of improperly. 

Contact us if you have any questions about bankruptcy, or recently closed financial accounts. I can help you determine if they will affect your ability to file bankruptcy.