In most bankruptcy cases, the debtors have enough exemptions to allow them to keep all funds in their bank or credit union accounts. Nonetheless, under some circumstances, a bank or credit union can freeze money in a checking or savings account after you file for Chapter 7 or Chapter 13 bankruptcy. Fortunately, you can avoid this situation by moving your checking, savings, and other financial accounts (including CDs, money market, etc.) to a new bank before filing for bankruptcy.

If any of the following situations apply in your case, you should move your accounts before you file:

You owe money to the bank where you have your checking, savings, or other accounts.

If, at the time you file for bankruptcy, you owe money to the bank or credit union where you have your checking, savings or other accounts, the bank can freeze any funds in your accounts to apply to what you owe it. In most cases, it does not matter if a bankruptcy exemption covers the funds in the account.

Example: Matt has a checking account and a personal loan at Big Bank. When Matt files for bankruptcy, he has $2000 in his checking account and owes Big Bank $5000 on the personal loan. The bank can freeze Matt’s checking account and apply the $2000 in his account to his loan balance. Thus, Matt is left with an empty bank account. It does not matter that Matt has claimed the $2000 as exempt in his bankruptcy schedules.

This right of “setoff” is permitted by state law and recognized by the Bankruptcy Code (§ 553). In Pennsylvania, banks generally have a lien on the debtor’s funds in the bank, if the account holder owes it money. Although there are specific requirements and exceptions, courts have held that once a debt is due, this right of setoff generally applies. Rather than risk losing the funds in your account or trying to deal with a setoff after it happens, it is a lot easier just to change financial institutions. It is a very unpleasant surprise indeed to find that you cannot get to the funds from the paycheck that you just deposited.

Note: You must cancel all direct deposits and electronic funds transfers to and from the old account before you file for bankruptcy. It can take time to process these changes. Therefore, you should confirm that automatic deposits are canceled before filing.

You are an authorized user on an account with someone who is not filing with you.

It is not unusual for a debtor to be “authorized on” a checking or other account belonging to someone else, even though none of the money in the account belongs to the debtor. For example, you may be authorized to write checks on an elderly parent’s checking account to pay that parent’s bills. If this account is in a financial institution to which you owe money, the bank could freeze it. In fact, even if you do not owe the bank money, it may freeze the account until the bankruptcy trustee sorts out ownership. In either case, you must request a letter from the trustee to the financial institution stating that the funds do not belong to you, which can take weeks or even months.

This situation can be a significant problem for the primary account holder because you must convince the trustee that none of the funds in the account belong to you. To do so, you will have to produce records and may even need testimony from the owner of the account. (If you have mixed your funds with another person’s funds in an account, cleaning up the mess could become even more difficult.) Therefore, you must tell your bankruptcy attorney about all of your accounts AND any accounts on which you are authorized. The last thing anyone wants is for Aunt Gladys to be unable to pay her mortgage and living expenses because her accounts were frozen.

Quick Note: It is possible to be an authorized user on someone’s account without knowing it, as when a parent places an adult child on an account “just in case” without telling him or her about it. (I have seen this situation in my Philadelphia Bankruptcy practice.) If you think you may be an authorized user of someone’s account, it will not hurt to ask.

You bank with Wells Fargo.

Wells Fargo will freeze your accounts if you file for bankruptcy, even if you do not owe it money. Why? It is a bit perplexing, but Wells Fargo claims that it has an obligation to preserve the assets of the bankruptcy estate even if the funds are exempt. This is a unique way to look at the law. In reality, all this practice accomplishes is more work for everyone involved, including the trustees. Again, it can be a time-consuming process to obtain a letter from the trustee to unfreeze the account. If you plan to file for bankruptcy, close all accounts at Wells Fargo and move to another financial institution.

Keep in mind that you can avoid most of the problems discussed above with a little planning. By telling your lawyer about all of your accounts upfront, you will save time and money down the road.

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