A recent decision from a bankruptcy court has given some explanation to a very common problem that Chapter 7 bankruptcy filers have. And although the case isn’t from California, it still is useful for those in San Diego looking to file bankruptcy.

What Happens to Money in a Bank Account?

A recent court addressed what a bank can and cannot do with money that you have in an account when you file bankruptcy. But to understand the case, a little background is needed.

When you file Chapter 7 bankruptcy, two important things happen.

First, an automatic stay is placed on all of your creditors. This is a freeze on any collections against you and any cases seeking to collect funds or take your property, and prevents virtually anyone from asking you to pay them any debt that you owe.

Additionally, anyone who has property that belongs to you or owed to you is supposed to turn it over to the bankruptcy trustee.

A unique situation happens when a bank has funds that belong to you in its accounts. When you file Chapter 7 bankruptcy, many banks react by “freezing” accounts, thus preventing you from accessing your funds. A recent case now may make such a practice illegal.

Bank Gets Sued For Freezing Accounts

The case concerns a couple with money in a bank account which they claimed as “exempt” in their bankruptcy case. The funds were frozen by the bank for five days, and after getting permission from the bankruptcy trustee, the bank released the funds back to the debtors.

But the debtors sued the bank, claiming that it had violated the automatic stay by freezing the funds. The bank countered by saying that because it was legally obligated to turn the funds over before getting permission to do otherwise, it was justified in freezing the accounts.

But the bankruptcy court disagreed, noting nothing in the bankruptcy code authorized freezing of any accounts by a bank or anyone else. The court held that the bank could have turned over the funds to the trustee, or else done nothing—but it could not unilaterally decide that it would hold funds by freezing an account, then ask for permission or direction from the trustee. Doing so violated the automatic stay that went into place when the case was filed.

Good Case For Bankruptcy FIlers

This is a big win for debtors. Bankruptcy filers still need funds to live off of after filing for bankruptcy, and in many cases funds in a bank account are exempt anyway. The ability for a debtor to access his or her own funds should not be based on an arbitrary internal bank policy of what happens to funds when a bankruptcy is filed. Rather, it should be based on the bankruptcy code.

The case does not prohibit a bank from contacting a trustee to inform him or her about the funds, nor does it prohibit the trustee from instructing that such funds be turned over to the trustee. Still, even if that were the case, a good bankruptcy attorney can ensure the safety of those funds, and possibly prevent the turnover from happening in the first place.

If you’re considering bankruptcy, make sure your attorneys know what will happen with all your property, and what you can expect after filing. Let experienced San Diego bankruptcy attorneys evaluate your case and discuss with you the best and safest path to discharging all of your debt. Contact the bankruptcy for a free consultation today.