Liquidation

• Chapter 7 bankruptcy liquidates assets above your personal exemptions, such as a house and car. A court-appointed trustee liquidates assets, which may include cash that you have on hand in your checking and savings account to pay off creditors. However, the court must also take into consideration your living expenses, particularly as you go through the bankruptcy process, which can take three to four months. Therefore, the court rarely liquidates personal bank accounts.
  
  

Means Test

• You must pass a means test to qualify for Chapter 7. Most borrowers qualify for Chapter 7 because they do not have excess income or cash to pay down their debts. The means test compares your household income to the equivalent median household income in your state. The court conducts a further test to determine if you are eligible for Chapter 13 bankruptcy, which is a debt reorganization plan.
  
  

Setoff

• Depending on the state law, if you have money in a checking or savings account with a bank that is also a creditor, the bank has right to claim a setoff or offset. Maryland is an example of a state with setoff rights. A setoff arises because of mutual indebtedness. Your deposited money is a liability for the bank since it owes the money to you. Conversely, a loan such as a credit card, overdraft account or credit line is your liability to the bank. Setoff rights hold that if two parties owe each other money, one party is entitled to withhold debt payment if the other party stops making payments. This includes bankruptcy. In states that have setoff statues, banks have frozen bank accounts of consumers who have filed for bankruptcy.
  
  

Automatic Stay

• You are given an automatic stay protection when you file a bankruptcy petition. Creditors must suspend collections efforts. The automatic stay provision overrules a bank's right to set-off. In addition, Regulation Z of the Truth in Lending Act prevents banks from using set-off to pay off consumer debt such as credit cards. Overall, the best way to protect yourself against illegal seizure of your property in bankruptcy is to hire a bankruptcy attorney.