By Cara O'Neill, Esq.
When the Bank Freezes Your Account
In an effort to preserve funds for creditors, some banks have a policy of freezing accounts when they receive a notice of a bankruptcy filing. Since they will only receive a notice if you list them as a creditor, you can understand why this would be done – they want to be paid.
Each state has guidelines for the amount of property you may retain in bankruptcy. This property is called your “exempted” property. If you properly exempted the funds in your bank account on your petition, the bankruptcy trustee will instruct the bank to release the freeze on the account.
If there is more money in your account than you can exempt, however, you will likely lose the funds over and above your exemption amount. Because of this, it is crucial that you do not have more money in your bank account than you are entitled to exempt on the day the petition is filed.
Freezing versus Set Off
Freezing your account is different than a set off, however. The right to a set off arises when you have both a checking or savings account and a credit account with the same institution. The contracts you signed likely give the bank the right to use your checking or savings account funds to pay, or “set off,” any money you owe the bank. This creates a security interest in the funds that the bankruptcy trustee cannot override. Be aware that in this case, it is unlikely you will recover your funds.
When the Bankruptcy Trustee Freezes Your Account
Once you file your petition, the bankruptcy trustee has the power to direct your finances, including freezing your accounts. While unusual, it happens when the funds exceed your exemptions, or when the bankruptcy trustee suspects fraud. A suspicion of fraud is typically triggered by someone coming forward with accusations that the person filing bankruptcy is hiding property.
How to Prevent Losing Your Funds
An easy way to avoid these problems is by not using your checking or savings account once you file bankruptcy. If you choose to operate on a cash basis, understand that the bankruptcy trustee will review your bank account withdrawals to ensure all money is accounted for. It is crucial to remain financially transparent by accurately documenting the amount of cash in your possession on your bankruptcy petition. The last thing you want to do is cause the bankruptcy trustee to suspect you are hiding money and file a complaint against you that will be costly to defend.
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