Your Bank Can Freeze Funds In Your Account When You File Chapter 7

One fact pattern I see repeatedly are clients who filed a Chapter 7 case and then find out to their horror that their bank, to whom they do NOT owe any money, has frozen the funds in their account. How can this happen?

Doesn’t the automatic stay prevent this?

Whenever this happens, I immediately know that they either represented themselves, or have an inexperienced attorney representing them.

Beware Wells Fargo Bank

At the present time, there are only a couple of institutions that do this (and one of them is Wells Fargo Bank).

And how can they do this?

The reason this is allowed is a rather esoteric and legalistic one. It basically has to do with the bank holding the funds as a custodian for the bankruptcy trustee.

The funds are not taken; they are just frozen until such a time as the Bankruptcy Trustee directs the bank to turn them over, or “abandons” the asset back to the debtor.

In most cases the debtor has an exemption which can protect the funds in the bank account. But there may be several weeks or even months where they will not have access to these funds, and this can cause obvious problems paying the rent/mortgage and other necessary obligations.

The obvious solution to this is to simply make sure that there isn’t a large amount sitting in one of these accounts on the date one’s bankruptcy case is filed. This is something almost any experienced bankruptcy attorney will advise his/her clients.

It is worth noting, however, that the above “freeze” only affects funds in a debtor’s bank account on the date the case is filed.   It does not affect funds deposited after.