Can a Bank Freeze My Accounts Because of Bankruptcy?

In recent years, several high profile banks have made the news by freezing the bank account funds of debtors that are filing for bankruptcy (usually those filing Chapter 7). In some cases, they have even frozen the accounts even if they are not directly owed any funds by the bankruptcy filing debtor.

The actions of these banks tend to create much confusion with bankruptcy attorneys and their clients. Many clients simply are not aware that this possibility even exists. In fact, the actions of these banks are legal for numerous reasons.

Transferred Property

Part of a case involving Chapter 7 bankruptcy is the automatic transfer of property from the debtor to the trustee assigned by the court. These transferred assets include large items such as a home or automobile, down to money and clothing. It is the duty of the Trustee to liquidate all of the debtor’s assets that have not been provided protection under any eligible exemption that is bankruptcy-related.

The actions of these banks appear to be providing protection (as part of a custodial effort) for the money held in the debtor’s bank account beginning on the day the case is filed in bankruptcy court. Apparently, this benefits the assigned trustee, and provides them the opportunity to use the money to pay down debts directly to creditors, or return (abandon) the money directly back to the bankruptcy filing debtor. The amount of money frozen only affects the funds that were held in the account on the bankruptcy case filing date.

Subsequent Deposits

Any subsequently deposited funds are not affected except that they are sitting in a frozen account. However, this creates a huge inconvenience. This is because having the account unfrozen can only be authorized by the court-assigned trustee.

The entire process could take many weeks. It might even involve the need for a motion filed in the court system and ordered by the judge. If the funds residing in the account are found to be exempt under bankruptcy law, they will likely be released eventually, but will remain frozen until then.

When Money Is Owed to the Bank

The banks have the legal right to seize monies in the debtor’s bank account owed to them to satisfy the debt. They have the legal right to take the monies held in the account up to a limit that is currently owed. However, this is only available to them for the amount of delinquency or back payments due.

Typically, this only occurs before the filing of any bankruptcy case. In effect, it cannot really be determined to be a bankruptcy issue. However, attorneys often advise their clients about to file for bankruptcy to move any funds out of a bank account and into a new institution where they currently do not owe any debt.

In fact, a frozen bank account can create devastating, long-lasting effects on a debtor’s finances. They can make it nearly impossible to maintain daily living expenses. It is imperative that insolvent debtors understand the potential perils of leaving funds on deposit with any bank that also acts as their creditor.

The debtor should expect that the banking financial institution can and will take every action necessary to set off the debtor’s rights and deprive them of direct access to their deposited money until their debt has been satisfied, or the trustee has lifted the freeze. This is because the funds can be completely removed or remain out of accessible reach of the debtor that holds the account.