Posted by David Leibowitz on April 29th, 2009 in Bankruptcy, Business Bankruptcy, Chapter 11, Bankruptcy, Chapter 11, setoff, uniform commercial code
My client called and was frantic. ”The bank took all the money from my account – I can’t make payroll and my checks are bouncing. Can they do that?
This is called “set-off”. And yes, the bank can do that.
Here’s the idea. If you have money in the bank, it is money that the bank owes you. But suppose you also owe money to the same bank. This typically happens to businesses which have loans with a bank and naturally maintain their checking account with the bank. So the debt you owe the bank – say a business loan – may be offset by a debt that the bank owes you – your money in the bank.
If you are in default with your bank under your loan agreement, even if you simply haven’t abided by various covenants or agreements in your loan agreement with the bank, the bank has the right to enforce its agreement with you.
For example, the bank has the right to set off the money in your checking account against the debt you owe the bank. This can be mighty inconvenient. Your employees won’t get paid and your checks will bounce. The bank also would have the right to enforce its security agreements with you – for example collect accounts receivable directly from your customers or even sell your assets at auction.
Chapter 11 of the bankruptcy code is your strongest response to these actions.
You’ll need a plan. You’ll need financing to operate while you are in reorganization. And you’ll need good legal counsel – like Lakelaw – to represent you in your chapter 11 case.
If your business can recover, you owe it to yourself to try. Otherwise, your business and life work will face liquidation and a rapid demise.