“The Bank Just Froze My Account!” (Setoffs and Bankruptcy)

I’ve gotten the panicked calls from bankruptcy clients.   “They’ve frozen my account!”   And the “they” is the bank or the credit union. (I’ll just call them both “the bank” from here on out.)

One of the first things I tell bankruptcy clients–and it’s on the initial handout you’ll get from me–is not to keep money in a bank in which the client owes money.   It’s like this: If you don’t repay the loan they made to you, then they don’t repay you the money you deposited with them.

Turn About’s Fair Play

When you make a deposit with your friendly bank, you’re loaning it money.   Most of us don’t think of it that way, but it’s true.   You deposit money.   They promise to give it back to you when you want it.   Sometimes the bank pays you back without interest–like with most checking accounts.   At other times, you actually get paid back with interest–like with a savings account, money market account, or certificate of deposit.

But it’s all the same.   You’re loaning money to the bank.   And if you have a loan and you don’t pay them back–you default, they’ll take the money from your account.   You have what the law calls “mutual obligations.”

The Solution

The solution–other than making your required payments–is to move your money.   If you find yourself in a situation where you can’t make the payments, don’t keep money in that bank.   Like most everywhere else, here in the Charleston area there are banks on every corner.   Just use another one.   I’m not saying you should ignore your obligations.   What I am saying is that if you can’t pay your debts, more than likely you need that money in your account for basic living expenses.   You can’t afford to have hundreds or even thousands of dollars seized.

If you get behind on payments, moving your accounts should be the first step you should take to stabilize your finances.   Then…..GET   HELP!

From time to time, I’ll discuss warning signs of financial trouble.   If your bank just froze your account, that’s a sign that you need to stop and get an assessment of your financial situation.

But What If They Already Took My Money?

If the setoff has already happened, there’s still hope.   In certain circumstances, we may be able to get your money back by filing bankruptcy.   Of couse, you would never file bankruptcy solely for the purpose of recovering a setoff, but if you need to file anyway–say because of the level of your credit card debt or to stop foreclosure proceedings–then you may as well try to recover the seized funds as part of your bankruptcy case.   And there is a way to do this in the right circumstances.

Still…..

It’s still best never to put yourself in this situation.   Be aware that your lender has the right to setoff against your account.   Also, you should be aware that your bank can do this even after you file bankruptcy. The Bankruptcy Code preserves setoff rights.   And if you think about it, it makes sense.   Why should anyone have to pay you back if you’re not paying them back?

Pay attention to where your funds are deposited and whether you are current on your loan payments.   If you’re not current, it’s better to be safe than sorry.   If you’re thinking about bankruptcy options, you should be thinking of your lender’s setoff rights.   Move your funds, and don’t make any additional deposits into that account!

5/30/2010 Postscript

Since originally publishing this post, Wells Fargo and Wachovia have begun freezing bank accounts owned by South Carolina bankruptcy filers regardless of whether debtors have outstanding obligations with Wells/Wachovia.   See my post on this subject here.   If you have accounts with Wells/Wachovia, DO NOT PUT ANY MORE MONEY IN THOSE ACCOUNTS AND REMOVE ANY EXISTING FUNDS FROM THOSE ACCOUNTS!