When you file for Chapter 7 bankruptcy in New York, you can probably use an exemption to keep all the money in your checking or savings account. This is why it is so alarming when your bank or credit union freezes those funds and leaves you with little or nothing to live on until the situation is sorted out.

How does it happen?

Although it doesn’t happen all the time, your accounts can be frozen after you file for bankruptcy if any of the following conditions apply:

  • You owe money to the institution where you bank. This obligation can be in the form of a credit card, personal loan, or line of credit. For example, if you have $1,500 in your checking account and owe the bank $3,000 on a line of credit, it can freeze your account and apply the funds to the debt, even if you claimed that money as exempt. This right of setoff, as it is called, is legal under §553 of the U.S. Bankruptcy Code.
  • You bank with Wells Fargo, which routinely freezes the accounts of bankrupt customers, even if they don’t owe it money. The bank has stated that it does this to preserve the funds as part of the bankruptcy estate. Your trustee will have to direct the institution to unfreeze your account, which can take weeks. In some cases, your attorney may have to file a motion with the bankruptcy court to release the money.

If your account ends up frozen, contact the bank to determine whether it has done so to offset a debt or protect it as part of your bankruptcy estate. Then contact your trustee or bankruptcy attorney for assistance: your trustee may have to produce a letter directing the account to be unfrozen or your attorney could have to bring the matter to the attention of the bankruptcy court.

Steps to take before filing for Chapter 7

If you owe money to the institution where you do your banking, it may be advisable to withdraw all of your funds, hold onto the cash until your filing is complete, and then open new accounts at another bank.

If you are an authorized user on someone else’s account, notify your bankruptcy attorney. The last thing you want is for an elderly relative to be unable to pay for their medication and living expenses because their account was frozen.

Contact a New York bankruptcy attorney

If you plan to file for Chapter 7, hire a bankruptcy attorney and discuss your banking information with them before you prepare your petition. With some planning, you can save yourself a lot of time, stress, and money in the future.

Jayson Lutzky is a Bronx bankruptcy lawyer handling individual and joint bankruptcy cases. If you have credit card debt, medical bills or personal loans and are struggling to keep up financially, then contact Mr. Lutzky’s office to set up a free in-person consultation to learn if bankruptcy is the right option for you.