Bankruptcy & Frozen Bank Accounts

By Heather Frances J.D.

Bankruptcy can offer a financial clean slate to debtors, but many debtors are concerned about what will happen to their assets and accounts after they file. Bankruptcy laws protect debtors against many actions by creditors once the debtor files for bankruptcy, though creditors are not bound by those rules prior to the debtor filing his bankruptcy case.

Automatic Stay

Once a debtor files for bankruptcy, he is protected by an automatic stay, which prevents creditors from continuing existing collection efforts or beginning new collection efforts. The bankruptcy court does not have to take any action for this stay to go into effect. For example, most creditors are not permitted to seize money in an account after a debtor files for bankruptcy, though creditors have much more leeway prior to filing.

Bank Creditors

Bank creditors are exempt from some aspects of the automatic stay if the debtor has money on deposit with the same bank through which it also has a loan. For example, if a debtor has a mortgage loan through the same bank where he has his checking account, the bank can freeze the checking account when the debtor files for bankruptcy as a set-off against the debtor’s mortgage debt. At least one large bank regularly freezes debtor accounts even if debtors do not owe the bank money. That bank claims it is acting as a custodian of the money in the account until the court-appointed trustee can exercise control over it.

Get a free, confidential bankruptcy evaluation. Learn More

Prevention

With some planning, debtors may prevent their accounts from being seized. For example, a debtor can remove all money from his bank accounts before he files for bankruptcy, particularly accounts at banks where he has a loan. He can also stop all automatic deposits and withdrawals from his existing accounts to avoid losing more money and compiling overdraft fees.

After Freezing

If a debtor’s account has already been frozen before he files for bankruptcy, the bankruptcy filing and automatic stay will not automatically unfreeze the account. Instead, the debtor must provide the sheriff who ordered his account frozen with proof of his bankruptcy filing; the sheriff will then contact the bank and order the accounts unfrozen. However, funds deposited into the account after the bankruptcy filing should be available for the debtor to use since the automatic stay protects those funds.

Get a free, confidential bankruptcy evaluation. Learn More
Can the Trustee Freeze My Bank Account During a Bankruptcy?

References

Related articles

Legal Rights After Chapter 13 Dismissal

A chapter 13 bankruptcy can allow someone under extreme financial pressure the breathing room needed to reorganize his debts and get out of his financial hole. In many cases, a debtor can stay in his home and keep his car and personal property under a Chapter 13 bankruptcy. When a Chapter 13 case is dismissed before discharge, however, it can put the debtor at risk of losing everything.

Can You Include Returned Checks in Chapter 7?

When a debtor files for Chapter 7 bankruptcy, he must inform the court of all of his liabilities, including returned checks. Returned checks represent the debtor's unpaid debts. As such, they are dischargeable in bankruptcy, unless the creditor can prove fraud on the debtor's part.

What Happens to a Cosigned Loan in a Bankruptcy?

When a debtor goes into bankruptcy, the people he owes money to are concerned that they will not receive what is owed them. One possible source of security for the creditor is the existence of a co-signer who is not going bankrupt. When someone co-signs a loan, he is obligated to step in and pay the outstanding loan if the primary borrower cannot meet his obligations. Courts are focused on the debtor’s financial obligations during bankruptcy, but the fact that a debt may be co-signed can make the bankruptcy process a little more complicated.

Related articles

Bankruptcy Laws Regarding Mortgage

Bankruptcy allows debtors to get some relief from a debt load they cannot otherwise overcome, but it doesn't always ...

Can a Bankruptcy Court Freeze My Bank Account?

Filing for bankruptcy is often a decision fraught with angst and uncertainty. Debtors are sometimes concerned about ...

What Happens to Open Lines of Credit With No Balance During Bankruptcy?

A debtor files bankruptcy to discharge his obligations and relieve himself of responsibility for paying them. If you ...

Can Someone in Chapter 13 Bankruptcy Get a Passport?

Debtors file for chapter 13 bankruptcy to obtain a fresh financial start by reorganizing and repaying their debts. ...

Browse by category
Ready to Begin? GET STARTED