Can Your Bank Accounts be Frozen During a Chapter 7 Bankruptcy?

This personal bankruptcy question was posted on the internet in 2011 in a bankruptcy discussion: “I keep reading about frozen bank accounts, and I am getting really worried. My family would not be able to survive without our money to pay bills and buy groceries. Are accounts automatically frozen?”

When you file for bankruptcy protection, the filing information is placed into the filing system of the U.S. Bankruptcy Court Clerk’s Office and becomes public information. Public Information Vendors collect the information and normally sell it to Credit Bureaus who then place it on their credit reports.

Most banks have access to the information because they subscribe to Credit Bureaus, and the subscription entitles them to run credit checks on potential or current customers. Even though banks have the ability to check your public credit records any time they feel the need, most banks will not access the information without a good reason like checking your credit for a loan.

Therefore, it is not likely that a bank will know you filed a bankruptcy unless they are one of your listed creditors or a part of non-exempt funds. Even if they do find out about the bankruptcy, each bank has its own policy about freezing accounts. There are a couple of banks notorious for freezing accounts under bankruptcy conditions, but many of the others select not to do so.

What some banks like credit unions are known for doing is taking cross collateral and using it to pay off a loan if they learn you have filed a bankruptcy. Cross collateral is any other account you may have with a bank or credit union while owing them money on a loan, secured or not.

A good rule of thumb in selecting a bank before you get into financial trouble is to ask about their freezing and cross collateral policies. Asking after you have filed a bankruptcy would probably raise a red flag. If you are concerned what the policies of your bank are, you might want to move your money to another account in an institution that has friendlier policies.

You also might have the support of the bankruptcy court when dealing with your account. You will have to list all of your accounts with the court, and depending on whether of not the funds in a bank account are exempt property in a Chapter 7 bankruptcy will determine how the court deals with the account.

If part or all the property is non-exempt, the bankruptcy court trustee will seize the account and distribute the non-exempt funds to your unsecured creditors. If there is exempt money as part of the funds, you most likely can get the trustee to distribute the money directly back to you, and you can place the money in any bank you want, or not.

If the bankruptcy court trustee and judge have been made aware of a bank account that has been frozen, there is the possibility the court will use the automatic stay to force the banking institution to unfreeze an account, allowing the full effects of the bankruptcy proceeding to take place.

Whether or not your banking account is frozen, bankruptcy laws can be very complicated. It is a good idea to consult with a bankruptcy lawyer before filing. Contact us now, and we will help you locate a bankruptcy attorney in your area.

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