Filing bankruptcy is a big decision. You want things to go as smoothly as possible. The last thing you need is trouble with your bank. Filing bankruptcy when you have an account at Wells Fargo can cause big problems.
If your the people who hold your money on deposit decided one day that you could not get to it, would you continue to do business with them? Of course not.
Most of us would consider that something close to theft. But one financial institution regularly does that to people who file bankruptcy: Wells Fargo, a popular label in the South since it bought out North Carolina-based Wachovia.
Virtually alone among banks, Wells Fargo claims it has a duty not to let you have your money if you file. And that’s why those in financial distress should not do business under the sign of the stagecoach.
To understand the background for this policy, let’s go back about 20 years. David Strumpf filed bankruptcy in Maryland in 1991. At the time, he was behind on a loan with Citizens Bank for about $5,000, and he also had a $3,500 checking account there.
State laws generally allow a bank to take money from a customer’s checking or savings account to pay defaulted debts the customer owes the bank – a right known as setoff. When someone files bankruptcy, however, a rule of bankruptcy protection known as the automatic stay means a bank may not take money out of a deposit account while the customer’s case is pending.
So Citizens came up with an idea. Instead of taking Strumpf’s money, it would just freeze it for a while. It called this an administrative hold. Then, after Strumpf’s bankruptcy case was over, it would apply his $3,500 to the defaulted loan.
Strumpf was not amused, and he sued Citizens in bankruptcy court for violating the automatic stay. The bankruptcy court ruled for Strumpf, and the case made its way up the court system. Finally, the U.S. Supreme Court decided Citizens was within its rights to put a hold on the checking funds, so long as it did not apply the funds until the bankruptcy case ended. It did not matter that, for Strumpf, this was just the same as letting the bank take the money at the outset – his checking account was lost.
For many years, then, we have known that a bank to which a debtor owes money can freeze the debtor’s checking or savings account with the same institution. But for several years Wells Fargo has pushed the envelope. It freezes deposit accounts of people who file bankruptcy even if the debtor does not owe it money. And it claims it has to do so.
When a person files bankruptcy, all his property comes, at least temporarily, under the control of an officer called the trustee. According to Wells Fargo, this means it must hold all the debtor’s funds until the trustee decides whether to take the money. Claiming it is simply preserving potential assets for the trustee, Wells Fargo imposes an administrative “pledge” or freeze, which effectively means the debtor cannot draw out his money, at least for now.
The flaw in Wells Fargo’s reasoning is that in most cases, all the debtor’s property is covered by exemptions the law gives us all to protect certain basic property. This means the debtor gets to keep the money on deposit. So instead of preserving assets, Wells Fargo is really just retaliating against people for filing bankruptcy.
Courts around the country have disagreed whether Wells Fargo is breaking the law by this policy. But the policy remains in place.
So if you have money deposited at Wells Fargo, withdraw it prior to filing bankruptcy. If you don’t, your checks will bounce all over town–mortgage, car payment, grocery store–you name it.