It doesn’t happen very often, but if your bank freezes your checking, savings, or other deposit account after you file for bankruptcy, it’s not only inconvenient, it can be downright devastating. Fortunately, with a little planning you can avoid a bank account freeze or take steps to minimize the impact and gain access to your bank account funds.
Why Will the Bank Freeze Accounts?
There are two primary reasons that a bank might freeze a checking, savings, or other deposit account like a CD.
- The bank is attempting to protect an asset -- your money -- that is part of the bankruptcy estate and under the jurisdiction of the bankruptcy court.
- To protect the bank’s right to offset your money against any debt you owe the bank.
The Bank May Freeze Your Account to Protect an Asset of Your Bankruptcy Estate
When you file bankruptcy, all of your property becomes part of the bankruptcy estate (see Property in Your Bankruptcy Estate). The bankruptcy estate is under the control of a trustee appointed by the bankruptcy court. The trustee can use property in the estate to pay your debts.
You are entitled, however, to keep certain assets to ensure your “fresh start” at the conclusion of the case. These are called exemptions, and they vary from state to state in type and amount. (Learn whether your bank account funds are exempt in bankruptcy.)The money in your bank accounts becomes property of the bankruptcy estate, but whether that property is exempt depends on the exemption scheme that applies in your jurisdiction. (Find the bankruptcy exemptions in your state.)
Upon your bankruptcy filing, some banks -- notably Wells Fargo -- will freeze your bank account to protect the asset. The bank does not make an independent determination as to whether the money is exempt. Instead, it waits until the trustee releases the asset or instructs the bank to turn over the funds to the trustee.
The Bank May Freeze Your Account to Offset Your Debt to the Bank
If you owe money to the bank where you keep your deposit accounts, the bank has the right to take money out of your accounts to satisfy the debt you owe. This is called the right of offset (or setoff). There are restrictions on when and how a bank can exercise its right of offset, but usually a bank will only take the money out of your account if you have defaulted on your obligation. (Learn about bank offsets.)
When you file bankruptcy, some banks will freeze an account to protect the funds until it can determine if it will exercise its right of offset. The automatic stay prohibits creditors from taking collection actions without bankruptcy court approval. Most bankruptcy courts that have considered the issue have concluded that an account freeze does not violate the automatic stay.
How to Avoid a Bank Account Freeze
If you owe money to the bank that holds your deposit accounts, consider closing those accounts and opening new ones at another bank or credit union before your file bankruptcy. Even though it may be a hassle to move your money, it is much more inconvenient to lose access to your money for weeks while you sort out whether you, the trustee, or the bank should have control of the account.
Even if you don't owe the bank money, it may be wise to withdraw your money before you file bankruptcy and hold the cash until after the bankruptcy is filed. The bank cannot freeze or offset money that is not in its accounts.
What to Do When the Bank Freezes Your Account
Contact the bank as soon as you learn that the bank has frozen your account. The bank will be able to tell you whether it froze your account in order to protect it as an asset of the bankruptcy estate or to hold it for possible offset against your debt to the bank.
If the Bank Intends to Offset Your Account
If the bank intends to offset the account, it must ask first ask the court permission to do this while your bankruptcy proceeds (otherwise it will violate the automatic stay). It does this by filing a motion to lift the automatic stay. The court will set the motion for a hearing, and unless you have a defense to the motion, the court will approve the motion and allow the bank to withdraw the money from your account and apply it to your debt.
If the Bank Is Trying to Protect an Asset of the Bankruptcy Estate
If the bank has frozen the account to preserve the funds as part of your bankruptcy estate, you must ask the bankruptcy trustee to notify the bank to release the funds. The trustee will determine if the funds are exempt or nonexempt. The trustee will then notify the bank to release the exempt portion of the accounts. Unfortunately, this can take weeks and can be complicated if you have multiple accounts or if you share the accounts with someone else. It may even be necessary for your attorney to file a motion with the bankruptcy court asking that the funds be released.