Filing for bankruptcy can be confusing to navigate, but having a plan of action and learning about bankruptcy before filing can help make the process as painless as possible. Xue Connelly, attorney at Wade, Grimes, Friedman, Meinken & Leischner, explains bankruptcy, the extent to which banks may control your account after filing, and steps you can take beforehand to avoid a frozen account.

What is bankruptcy?

Bankruptcy refers to the federal legal process involving an individual or business unable to repay their ongoing debts. The process begins with the debtor or, in less likely circumstances, the creditor filing a petition declaring bankruptcy in federal court. After doing so, the debtor’s assets are measured and assessed and may then be used to pay a portion of the remaining debt.

The bankruptcy law recognizes that the debtor has ongoing expenses such as rent, groceries, etc., and needs to maintain the ability to pay these expenses. For this reason, a debtor’s finances are not “frozen” after initially filing their bankruptcy petition in court. The level of access to prior finances for the debtor is a decision made by their bank. 

Under what circumstances can a bank freeze my account?

Short answer: If you hold a deposit account at an institution where you also have taken out and subsequently owe loans.

Explanation: A bank that functions as a creditor to the debtor maintains the right to a setoff. A setoff is a contract provision that essentially grants banks the ability to take remaining funds from your checking and savings account and apply it towards any bank-held debt or loan balance. While the bank is awaiting their setoff request to be reviewed in bankruptcy court, they may freeze your account completely.

How can I avoid a frozen account before filing for bankruptcy?

Short answer: Cut off automatic drafts of payments, or move your checking/ savings account to another bank before filing for bankruptcy.

Explanation: If you have remaining debt on loans that have been taken out with the same bank where you hold a checking or savings account, there are still steps you can take prior to filing bankruptcy to avoid a frozen account. The first option is to simply notify the creditor that you plan on filing for bankruptcy and request a cease in all automatic payments from your bank. The second option is to relocate your savings and checking account to another bank before filing for bankruptcy. 

“Relocating your savings and checking accounts is considered the more effective option for protecting your finances in a situation of this nature because it completely eliminates the initial creditor banks right to a set-off,” says Ms. Connelly.  

What can I do if my account is frozen?

If your account has already been frozen, immediately contact your bank. Be sure to evaluate if the account has been frozen for an offset claim or as a measure to protect your finances. If the account has been frozen by the bank as a measure to protect their right to an offset claim, unfortunately, there are not many options for you. 

If you find yourself in this particular situation the best steps you can take are contacting an attorney to help you navigate the bankruptcy process and also ensure any entitlement to finances you may potentially still have.  

For more information on bankruptcy, please contact Xue Connelly.

Whether you are facing a family law, protective order, estate planning, bankruptcy and/or criminal-law-related issue, Wade Grimes Friedman Meinken & Leischner PLLC is here for you during challenging times.