Saturday, September 27, 2008

Changing Banks Prior to Filing Bankruptcy

Debtors who have decided to file for bankruptcy should plan ahead to be ready for the short term consequences that might result. For some debtors, pre-bankruptcy planning may include closing bank accounts and moving their money to a different financial institution.

Reasons to switch to a different bank or credit union include:
  • Avoiding having your bank account temporarily frozen. Some banks like Wells Fargo have a policy to place an administrative freeze on any account of a newly-filed Chapter 7 debtor with a balance exceeding $5,000. Other institutions like Union Bank are even more strict on this issue. One colleague told me about a case where Union Bank had frozen a debtor's bank account that contained only $16. In theory, the banks are protecting assets of the bankruptcy estate. In reality, this type of bank policy creates a huge inconvenience to customers and does little to preserve bankruptcy estate assets.
  • Ending automatic withdrawals. Many debtors set up automatic withdrawals taken from their bank account to pay credit card bills. Even with the filing of a bankruptcy, there is not guarantee that automatic withdrawals will stop. It is easier to close a bank account than to get money back that a creditor improperly withdrew from your account.
  • Avoiding set offs. Sometimes debtors bank with an institution that has also issued credit cards to them or provided other forms of credit. It is not uncommon for a bank to claim money from a debtor's bank account as a set off against other money owed by the debtor. Closing your account or keeping a low balance will minimize the risk of a claim of set off.
Debtors considering bankruptcy should avoid banking with Wells Fargo, Union Bank of California and any financial institution to which the debtor owes money. If a creditor does improperly remove money from your account after your bankruptcy is filed, contact your attorney immediately.

UPDATE:  Wells Fargo completed its purchase of Wachovia in December 2008.  I have heard from colleagues in other parts of the Wachovia is now engaging in this same practice, so debtors filing for bankruptcy should strongly consider moving their money from Wachovia before filing their case.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.


Anonymous said...

Would this still hold true if you were *not* a debtor to those banks?
I'm one week away from filing Ch7,
and opened a new checking acct with
Union Bank, with whom I've never had
any dealings with at all. (Perhaps
I should have waited until after filing to open, but I was trying to be pro-active)
Union Bank will appear on my Ch7 paperwork and will therefore be notified, but I do not owe them anything. Do you think they will still freeze my account?

Carl Starrett said...

If you are filing for bankruptcy, I would not do business with Union Bank under any circumstances. They will most like freeze your account unless they get a court order or a release from the trustee.

Minnesota Bankruptcy said...

Good post. Make sure you talk to qualified people for advice.