Avoiding Frozen Bank Accounts in Bankrkuptcy
If you are considering filing for bankruptcy in California, there are a number of California banks and credit unions that freeze accounts for a variety of reasons when a Chapter 7 bankruptcy is filed. In the past, Wells Fargo often froze accounts listed in a bankruptcy if the balance exceeded $5,000. The Ninth Circuit BAP recently has ruled that an automatic freeze of a bankruptcy debtors' accounts by Wells Fargo, unrelated to a right of setoff, constitutes a violation of the automatic stay. Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi), 432 B.R. 812 (B.A.P. 9th Cir. 2010).
Wells Fargo was a creditor and the debtors in a Chapter 7 bankruptcy also had bank accounts at Wells Fargo. Wells Fargo froze the debtors' accounts upon learning of the debtors' bankruptcy filing. The freeze was employed, not to assert any right of setoff that Wells Fargo had, but pursuant to the bank's policy to freeze accounts of all customers that file a bankruptcy petition.
If you are considering a Chapter 7 bankruptcy in California we urge you to review the following tips pre-filing:
1) Keep your funds in a bank where you don't owe money. This will protect you from having funds seized by creditors linked to or secured by your checking and savings accounts such as credit card companies or having unwanted automatic withdrawals continue.
2) Avoid the use of credit cards to make unnecessary purchases, especially in the 90 days before filing your bankruptcy which is considered the presumptive period. A creditor may object to the dischargeability of these debts based on fraud.
3) Don't transfer money to relatives bank accounts in the year before filing for bankruptcy since it will be considered an insider transfer and the funds will be seized by the bankruptcy Trustee. These transfers, are viewed by the court as "preferential transfers" since you're transferring money to insiders and not paying your unsecured creditors. Any transfers or payments for the year leading up to your case being filed must be disclosed, and the Trustee will go after the recipient to recover those payments.
4) Remove yourself from bank accounts that you are not using and that do not have your money in them. If the balances in your collective accounts with any bank exceed $5,000, banks are often imposing freezes on the accounts, eliminating your access to the money until the bankruptcy trustee can review and rule on their release which may be 30 days.
5) Don't fail to disclose any accounts to your bankruptcy attorney , including business accounts and those for which you have signatory rights for relatives because failing to report the accounts may result in their being frozen and/or elimination of the exemption for the funds.
6) Don't use funds from tax exempt accounts such as a 401K or other retirement accounts to pay off any debts, including secured debts such as car loans. You are thereby eliminating the protected status of the tax exempt funds and risking losing them in the process.
Before you file for bankruptcy you should consult with an attorney to determine whether your bank accounts might be frozen and to make sure that your accounts are legally exempt and cannot be seized by the trustee for the benefit of the creditors.