Should You Change Banks When Filing Bankruptcy?

Every night, while the rest of the country sleeps, Wells Fargo Bank cross-checks all newly filed Chapter 7 bankruptcy petitions against its list of account holders. If a Wells Fargo account holder has filed bankruptcy, the bank may place a “temporary administrative pledge” (a “hold”) on the debtor’s account(s). This hold is a certainty if the debtor has a bank account and owes Wells Fargo money. The bank then sends a letter to the Chapter 7 trustee requesting instructions as to how Wells Fargo should dispose of the account funds.

When a debtor files Chapter 7 bankruptcy, all of his assets become property of a bankruptcy estate and are under the control of the bankruptcy trustee. The debtor may claim assets as exempt, such as bank account funds, but the claim is only an interest in the funds (at least according to the Supreme Court decision, Schwab v. Reilly). A party in interest has 30 days after the meeting of creditors to file objections to the debtor’s exemption claim. Only then is the property actually exempt.

So what does all this mean?

It means that Wells Fargo can place a hold on your Wells Fargo bank account and refuse to release your money until 30 days after your 341 meeting has concluded. That could be more than two months after you file! That is the consequence of a recently decided case from the Ninth Circuit Court of Appeals, Mwangi v. Wells Fargo Bank, No. 12-16087 (9th Cir. August 26, 2014).

The Ninth Circuit in Mwangi stated that debtors lacked standing to assert that Wells Fargo violated the automatic stay when it froze their account because: (1) the debtors had no right to possess or control the account funds during the 30 day period for objections to claimed exemptions (the property was under the control of the trustee); and (2) after the objections period ran, property claimed as exempt passed out of the bankruptcy estate. See Section 522(l); see also Smith v. Kennedy (In re Smith), 235 F.3d 472, 478 (9th Cir.2000)(“[i]t is widely accepted that property deemed exempt from a debtor’s bankruptcy estate revests in the debtor”).

Based on this ruling, Chapter 7 debtors should examine their banking situation prior to filing bankruptcy, especially when Wells Fargo is involved. Opening up another account at a different bank after filing bankruptcy and changing all direct deposit accounts may help. An experienced bankruptcy attorney can review your case and recommend a strategy to avoid a bank account freeze.