When banks can legitimately freeze your money in bankruptcy
In some cases, a bank or credit union can lawfully freeze or even seize some (or all) of your bank account funds when you file bankruptcy. If, for instance, you have a car loan, personal loan or credit card issued by your bank, they can take your money when you file bankruptcy. Say you have $3,000 in your bank account that you were planning to use as your cash reserve to cover living costs while you go through bankruptcy. And say you have a credit card issued by the same bank where you have your money stashed, and you owe $3,500 on the card.
You file Chapter 7 bankruptcy then, a week later, try and swipe your debit card to buy groceries. Your card is rejected, and you're shocked. Then you log on and check your bank balance and find it is zero. Here's what happened. When banks offer credit to their customers, they have a right of offset written into the terms and conditions of the finance agreement. They can technically exercise this right at any time, but usually don't exercise the right. However, once your bank or credit union is notified that you've filed bankruptcy, they will likely exercise the right of offset and freeze then seize your funds.
When banks freeze your money in bankruptcy for no reason
But some banks make a habit of freezing money during bankruptcy even if you have no debt owed to them. They claim they do this to protect the rights of the Trustee and preserve your bankruptcy estate. But it's not required by law and they're just doing it because they can. Wells Fargo is one of these banks, but it's not the only one. And after Wells Fargo froze the money of one bankruptcy filer, he sued and won his case.
The victory was not a huge financial win since it resulted in just $25 in damages but did cover all of his attorney's fees. And, as the judge in the case harshly criticized the bank for its actions, it was a moral victory as well. The National Association of Consumer Bankruptcy Attorneys (NACBA) filed a brief in support of the bankruptcy filer. President of the NACBA, Attorney Ed Boltz is one of the attorneys at the Law Offices of John T. Orcutt. He fights to protect the rights of consumers in North Carolina through the law practice and all across the country through his work at the NACBA.
How to keep your funds safe during bankruptcy
North Carolina bankruptcy exemptions protect assets during bankruptcy, up to a certain amount, including cash in the bank, unless there is a right of offset. If your bank does freeze your funds, your bankruptcy attorney can fight to get them unfrozen, but this can take time you don't have if you were relying on that money for living expenses. The better strategy is to not let them take your money at all, and you can prevent it.
If you bank with Wells Fargo, Union Bank, or a bank/credit union where you also owe a debt such as a mortgage, credit card or other loans, prior to filing bankruptcy and as soon as possible, take the following steps:
- Move your work direct deposit to a new bank that's unrelated to Wells Fargo or your existing bank or credit union
- If you have income that will be exempt from the bankruptcy, such as social security, set that to be direct deposited into another account separate from non-exempt income
- If you share a bank account with a spouse who is not filing bankruptcy with you, both of you should open new accounts separate from each other at a new institution
- If you share a bank account with someone else, like a parent, you should have yourself removed from their account for now
- Leave your other account open and with just a few dollars in it and then you can close it out after your bankruptcy is all wrapped up