Filing bankruptcy is a good way to get relief from the mountain of debt you're struggling to pay, but some unintended consequences can result if you don't handle it the right way. For example, your bank may freeze your accounts once it receives notice that you've filed a petition. Here are two reasons why and what you can do about it.
It's Trying to Protect Your Money
Although it may feel like it at times, banks don't always have villainous intent when they take certain actions. In the case of a bankruptcy filing, the bank may actually be trying to protect your money.
When you file bankruptcy—whether chapter 7 or 13—all your assets become part of what's called a bankruptcy estate, or a pool of financial resources the trustee pulls from to pay your creditors. However, the law allows for certain assets to be exempt from being included, and you can use state or federal exemptions to protect a limited amount of cash and property.
Upon being notified about your bankruptcy, the bank freezes your account—likely to prevent the trustee from taking money before you have an opportunity to use your exemptions to protect the cash. This is particularly true if your bank knows you receive protected payments—such as Social Security funds or unemployment benefits—that legally can't be touched.
Fortunately, you can regain access to these funds by contacting the trustee. The person will evaluate your case to determine if the money in your account is exempt and then contact the bank to have it remove the freeze. This can take a long time to accomplish, though, so if you have the opportunity to do so, it's best to withdraw the money before you file bankruptcy to avoid this outcome.
It's Trying to Collect a Debt
A bankruptcy filing may also spark an account freeze if you owe the bank money. For instance, if you have a credit card issued by your credit union with a balance that's likely to be wiped out by a discharge, the bank may freeze your account. To mitigate its losses, the bank freezes your account to use the money to offset what you owe them.
Even though there's an automatic stay that stops the bank from initiating collection action, courts have ruled that account freezes don't count as long as the bank doesn't take any money at that time. However, banks do have the right to take the cash as soon as the trustee says they can, so it's just a matter of time before you lose those funds.
Once the bank has frozen your account, it's incredibly difficult to recover the money that was in it. You'll have to challenge the bank's motion to offset your debt in court and provide a viable reason why you should be able to keep your cash. In this situation, it's best to contact a bankruptcy lawyer for assistance.
For more information about filing for bankruptcy, contact a local bankruptcy attorney.
When you are faced with a serious legal matter, it only makes sense to work with an attorney who has the skillset to help. Attorneys are specially trained to manage everything from courtroom appearances to issues with paperwork, which is why you should have one on hand for when you are faced with an emergency. The purpose of this blog is to make it easier to understand when you should call a lawyer and how they can help. Read more on this blog to sort out everything you need to know to improve your legal prowess every single day, preventing problems.