Can Banks Freeze Assets in a Consumer Bankruptcy?

If you file for personal bankruptcy, can your bank freeze assets in your account to ensure they are there to repay your creditors? That is a question that big banks like Wells Fargo have been dealing with across the country, and a recent decision on the east coast held in the consumer’s favor. According to an article in the New York Post, after several victories for Wells Fargo in other bankruptcy courts, Bankruptcy Court Judge Cecilia G. Morris held that Wells Fargo cannot freeze a debtor’s assets and control access to them.
Banks Freeze Your Funds to Preserve Them for the Bankruptcy Estate
Before we can think carefully about the significance of the recent bankruptcy court decision that went against Wells Fargo, it is important to understand why the bank would freeze a debtor’s assets in the first place. In general, there are two reasons a bank might freeze a debtor’s assets when she files for Chapter 7 bankruptcy: 1) the bank wants to protect the money because the debtor owes the bank; and/or 2) the bank wants to protect the money to preserve it for the bankruptcy trustee.
The recent case doesn’t concern situations where the debtor actually owes money to the bank, so let’s take the situation off the table for now. What happens, then, if a bank attempts to freeze your accounts simply to preserve your assets for the bankruptcy trustee? You should remember that when you file for Chapter 7 bankruptcy, you will need to turn over all assets that are not exempt. Under Illinois law, many different exemptions exist from portions of your wages to retirement benefits.
A bank like Wells Fargo is not concerned with exemptions. Consumer advocates suggest that Wells Fargo is particularly notorious for freezing debtor’s assets—even those that are exempt—when the debtor files for bankruptcy but doesn’t owe anything to the bank. Wells Fargo won’t determine whether your assets in the bank are exempt during bankruptcy. Instead, they will often freeze the account. According to the New York Post article, part of the reason that Judge Morris found in favor of the debtor is that there are serious “inconsistencies in Wells’ national program, which only freezes balances worth more than $5,000.”
Wells Fargo Shouldn’t Be Able to Seize Assets
With a better understanding of why and how a bank like Wells Fargo will freeze the assets of a consumer who files for bankruptcy, let’s take a look at the case. Rodney Wayne Weidenbenner, a small business owner, lost much of his money in the recession. The funds he had remaining were held in four separate Wells Fargo accounts. Due to insurmountable bills, Weidenbenner and his wife filed for bankruptcy protection in March of 2014. Through exemptions, they were able to keep $6,900 available to them for living essentials, such as “business expenses, prescription medication, and diapers for their youngest child.”
However, Wells Fargo claimed that “the bankruptcy code required it to preserve estate funds and follow the trustee’s directions regarding the money.” As such, the bank “cut off access to almost all the money.” And Judge Morris emphasized that the bank simply is not permitted to freeze assets in this manner and for this reason. The judge described the bank of “grandstanding about bankruptcy-code compliance,” delivering one of the first blows to Wells Fargo’s procedures in consumer bankruptcy situations.
While the case described took place in New York, it could have significant implications for residents in the Chicago area. If you have questions about bankruptcy exemptions in Illinois or how to begin the process of filing for bankruptcy, don’t hesitate to contact a dedicated Chicago bankruptcy lawyer.
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