Filing bankruptcy does not “stop” or “freeze” your finances. The bankruptcy law recognizes that you have an on-going need to pay for gas, food, the rent, etc. This implies money is available, which can be a problem if the money is in a checking or savings account at a bank where you owes money.
When Your Bank is a Creditor
After you file bankruptcy, if you have a deposit account at a bank where you owe money, the bank has a right of setoff. Simply, the bank may be able to apply money from your checking or savings account to pay a bank-held debt, like an overdraft or a defaulted loan. The 1995 US Supreme Court case of Citizens Bank of Maryland v. Strumpf, 516 US 16 (1995) holds that a bank can freeze an account and withhold funds so that it has time to make a request for setoff from the bankruptcy court. Once an account is frozen for setoff purposes, the money is likely gone for good.
If you have a deposit account at a bank where you owe money, it is probably a good idea to switch banks before filing bankruptcy. You should keep the old bank account open, but only maintain a small balance. Remember to change any direct deposit to the new bank account and cancel all monthly direct debits.
When Your Bank is Not a Creditor
When a bankruptcy is filed, the clerk of the court sends a notice to the bank regarding the case. It usually takes a few days for the bank to receive notice, however some larger banks compare the list of recent bankruptcy filings against their accounts. If an account holder has filed bankruptcy, some banks will freeze the account immediately, whether it is owed money or not. Wells Fargo Bank reportedly does this, calling it an “administrative hold.” However, many courts are finding that Wells Fargo’s practice is a violation of the automatic stay, since Wells Fargo does not turn the money over to the bankruptcy trustee nor seek direction from the bankruptcy court. See Mwangi v. Wells Fargo Bank, N.A., 432 B.R. 812 (B.A.P. 9th Cir. 2010); see also In re Weidenbenner, 521 B.R. 74 (Bankr. S.D. N.Y., 2014)(distinguishing Strumpf saying that because Wells Fargo was not a creditor in the debtors’ case, it had no setoff right and could not freeze the debtors’ bank accounts).