WHAT'S AN "ADMINISTRATIVE FREEZE" OF A BANK ACCOUNT?
I discussed bank administrative freezes in a very recent article called Court of Appeals Allows "Administrative Freeze". If you have a checking or savings account at a bank or other financial institution and you file bankruptcy, normally your money in that account is protected from the blanket protection you receive under bankruptcy law against your creditors pursuing you and your assets. So usually that money is fully accessible to you after your bankruptcy case is filed. Indeed creditors are forbidden from trying to tap into that money through a garnishment or other collection procedure, so that money is often much safer than if you hadn't filed a bankruptcy case.
But if you owe money to the bank where you have your account—such as on a credit card or a loan—the bank may argue that it can use money in that account to pay the debt you owe to it. Its argument is that the money in the account is actually money it owes to you, and it can cancel that debt to you in return for you canceling your debt to it. It is a setoff of the two debts against each other.
Bankruptcy stops this kind of setoff usually. But an administrative freeze is a step short of a setoff: the bank is not attempting to take the money in the account to pay itself but rather "freezing" it—preventing your access to it until the bankruptcy system tells it what it should do with the money. The Court of Appeals ruling mentioned above held that under some circumstances an administrative freeze is legal. This article today is about getting a better practical understanding of administrative freezes and how to avoid risks associated with them.
CAN YOU AVOID THE RISKS OF AN ADMINISTRATIVE FREEZE BY SIMPLY NOT HAVING YOUR ACCOUNT(S) WITH A FINANCIAL INSTITUTION TO WHOM YOU OWE A DEBT?
Practically speaking, your checking and savings account money is likely safe if you don't owe any debt to the financial institution where you have your account(s). A bank, credit union, or other financial institution doesn't have any motivation to freeze your account unless it has something to gain from doing so. If you don't owe the financial institution any money, then it has no reason to take the hassle and risk of withholding your money from you.
In the appeals case referred to above, the bank was owed more than $50,000 and the debtors had four accounts at the bank holding more than $17,000. Even if the bank knew better than to try to grab all that $17,000 for itself as a setoff once the debtors filed bankruptcy, it could try to get a portion of that $17,000 if it, or some of it, was given to the bankruptcy trustee and distributed to all the creditors. It's not likely the bank would have made such a fuss if the bank wasn't owed anything. (No doubt the relatively large amount of money in the accounts was a motivating factor as well.)
CAN AN ADMINISTRATIVE FREEZE HAPPEN EVEN IF YOU DON'T OWE ANYTHING TO THE BANK OR FINANCIAL INSTITUTION WHERE YOU HAVE YOUR CHECKING/SAVINGS ACCOUNT?
Theoretically, yes. The bank in the court of appeals ruling made a big point of saying, and the court also emphasized, that it was not freezing the account to collect on the debt owed to it but rather simply to get court guidance about what it should do with the money in the account. So any financial institution where a debtor held an account—even if that financial institution was not owed any money—could potentially freeze an account and ask for guidance about what it should do with the money in that account.
However, I have never seen this done in any situation in which the financial institution was not owed any money. Again, they have no financial incentive for it to do so. And with banks and such, money is what counts.
Nevertheless, to be cautious it is still probably wise to avoid having your checking and/or savings account at certain financial institutions which have a history of being aggressive with administrative freezes, EVEN if you don't owe them anything. It is not a coincidence that Wells Fargo Bank was the bank in that recent appeals case—it has been notoriously aggressive all over the country in pushing administrative freezes on their customers' accounts. Union Bank is another bank with that reputation. Ask your attorney whether your bank or financial institution has such tendencies.
WHAT ABOUT JOINT BANK ACCOUNTS WITH SPOUSES OR OTHERS NOT FILING BANKRUPTCY?
Joint accounts are an important practical concern, with both spouses and others—especially family members—you might be on an account with.
It is not unusual for one spouse to file a bankruptcy case without the other spouse. There are many situations in which that is the preferred way to file. But you have to be very careful to remember which checking/savings accounts are in both spouse's names, and which could thus be frozen because of the bankruptcy-filing spouse's debts.
Take the example of two spouses who keep their checking accounts separate, the wife at Wells Fargo and the husband at U.S. Bank. The husband also has a debt to Wells Fargo from before their marriage. The husband files a bankruptcy case to discharge his debts, forgetting that although he never uses his wife's checking account he is a signer on the account. Wells Fargo freezes the "wife's" checking account because of his legal connection to it. The problem would likely get resolved eventually, but it would be much easier if the husband would have taken his name off her account beforehand.
Similar issues can arise with other people's accounts that you may be on for estate planning or other legitimate purposes. I had a client who forgot she was listed on her father's business account at Wells Fargo Bank although she legally owned no share of the business. When she filed bankruptcy Wells Fargo froze the business account. You can imagine the headaches that caused the unsuspecting dad.
So be sure to be mindful about what financial accounts you may have your name on. And then discuss it with your bankruptcy attorney.
AREN'T THESE KINDS OF ISSUES RESOLVED IF THE MONEY IN YOUR BANK ACCOUNT IS ALL COVERED BY A PROPERTY EXEMPTION?
Practically speaking, generally yes. Technically speaking, not necessarily. Let me explain briefly.
When you file a bankruptcy case in California you have to use our state's unusual property exemption scheme; you can't use the federal one. California's exemptions are unusual in that you have a choice of two different set of exemptions. One set gives you a "wildcard" exemption that you can use on money in a savings/checking account up to $1,350, and substantially more if you are not claiming a homestead exemption (because you rent and don't own a home, or have no equity in a home). So if that set of exemptions is right for you, you can protect a fair amount of money in your account(s).
If all of the money in your accounts is exempt, it is extremely likely you will have full use of it when you file bankruptcy. However, as the appellate opinion that I keep referring to made clear, in a Chapter 7 "straight bankruptcy" case all of your assets technically belong to your "bankruptcy estate" until the time expires for the trustee and creditors to object to your claimed exemptions. That is what allowed Wells Fargo Bank in that case to put an administrative hold on the debtors' accounts during that span of time.
SO WHAT'S THE BOTTOM LINE HERE?
Administrative freezes on your checking and savings account can be avoided in bankruptcy, but it takes some extra effort and care. You need to consider (with your attorney) where you have your accounts, and may need to change to another institution. Pay special attention to any accounts you may be signed on with somebody not filing bankruptcy with you. And talk all this over with your attorney so that you can get the reassurance that the right steps will be taken so that your accounts will not be frozen.