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.
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 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.
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.
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.