Can Wells Fargo freeze bank accounts because of Bankruptcy

In Romania, the country where my ancestors are from there is an expression, “Don’t go trying to be more Catholic than the Pope.” And when it comes to Wells Fargo and Wachovia, as you will see below, that is exactly what they are doing. They are acting more like bankruptcy officials than what they are, a bank.

If you read my last blog article titled Is Your Bank Account Safe if You File For Bankruptcy then you know that a bank has the right, in certain instances, to a setoff. As explained in my previous blog article, a setoff is a legal right afforded to your bank whereby it is permitted to seize the money out of your bank account the moment that you have defaulted on a loan with your particular bank. In the bankruptcy context the bank’s right to a setoff will occur as follows: You have a checking account and a car loan with Big Bank. You are current on your car loan with Big Bank. Say you file for bankruptcy. The moment that you file for bankruptcy you are deemed to have defaulted on your car loan with Big Bank. As a result, Big Bank can now freeze your bank account and eventually can take your money that was in your account.

What Wachovia and Wells Fargo now do is take the concept of a setoff to a whole new level. According to Wachovia and Wells Fargo, if you file for chapter 7 bankruptcy, they will freeze your bank accounts that you have with them, regardless of whether or not you have any loans with them. I repeat, you do not need to have a credit card, car loan, mortgage or any other type of loan with Wachovia and Wells Fargo for them to freeze your account. The moment that Wachovia/Wells Fargo discover that you have filed for chapter 7 bankruptcy they claim to have the right to “freeze” your bank accounts and await the guidance of the chapter 7 bankruptcy trustee to see if and when they should release those funds back to you. Meanwhile, weeks go by during which you cannot access your money, your outstanding checks have bounced, and your automatic monthly payments are no longer being honored by Wachovia/Wells Fargo.

Wells Fargo and Wachovia take the position that its policy is a sound one that benefits the bankruptcy system because they believe that your money in your bank account is property of estate. Meaning when you file for chapter 7 bankruptcy everything that you own, theoretically, now belongs to the trustee, whose job is to administer all of your assets on behalf of your creditors, subject to certain exemptions, allowing you to keep certain property. Their misguided notion is that the money in your bank account is property of the estate and that they have a duty to preserve it for the bankruptcy trustee.

Hey, Wells Fargo/Wachovia, what gives you the right to play both judge and jury?! Why are you taking on the role of a bankruptcy trustee? When someone files for chapter 7 bankruptcy and exempts the funds that they have in your bank, it is up to the trustee to decide if those exemptions were properly taken. And if the trustee happens to decide –in those rarest of cases- that the exemption taken by the filer was improper weeks after the bankruptcy case was filed, then believe me, the trustee will not be shy about making that objection and coming after the individual who filed for bankruptcy. And what of the fact that no other bank in the United States has such a policy at this time? You think that might be an indicator that you might be acting a bit too overzealously?! What’s next, freezing my bank accounts because your computer system just found out that I have some outstanding parking tickets? After all, there is a chance that when the law finally catches up to me, I may not have the funds to pay for those tickets.

Now, in Wells Fargo/Wachovia’s “defense”, their policy also states that they will not employ this draconian measure unless the individual has at least $5,000.00 in their bank account(s). However, out of an abundance of caution, if you are contemplating filing for bankruptcy, take your money out of your Wells Fargo/Wachovia accounts and place it elsewhere. After all, as much as it might be interesting for you to take your case all the way up to the Supreme Court, you probably would rather avoid that fight.

Is your bank account safe if you file for bankruptcy?

What the heck just happened?! Why did the bank just remove all the money that I had in my bank account and clean me out? Why did the bank just rob me is what you might be thinking? Well, the likely answer is because you probably owe the bank some money. The bank was probably exercising its right to a setoff, a right recognized in virtually all states in the United States.

This is what probably happened. You opened up a bank account at your local friendly credit union. Then, at some point, you took out a credit card with that same credit union that offered that unbelievable low rate. Finally, when it was time to finance a car, you once again turned to your credit union. Thereafter, at some point, you fell behind on your car or credit card payments, and so the nice credit union helped itself to the money that you had in your account.

Once you have defaulted on any of your loans the credit union does not need to sue you, they do not have to get court permission, and they certainly do not have to give you advance notice that they are about to help themselves to the money sitting in your account. And to add insult to injury, those outstanding checks that you wrote a few days prior to the bank robbing you (the bank exercising its right to a setoff if you want to get technical), those checks will undoubtedly bounce!

What can you do to prevent this from happening to you? It’s simple. The moment that you realize that you will be unable to make payments on a credit card, personal loan, mortgage payment, car loan, whatever, with the bank/credit union where you also have your checking and savings account, remove all money from those accounts and place them with a bank to whom you owe nothing to.

How about if you have not defaulted on any of your accounts with the bank? Well, in this case you have nothing to worry about, unless that is, you are about to file for bankruptcy. For instance, you want to file for bankruptcy because you have $20,000 in credit card debt with 5 different banks and none of those credit cards is owned by the credit union where you bank. The only ties that you have to your credit union is your bank account and a car loan for instance, which you have never missed a payment on and are current on the day you decide to file for bankruptcy. It does not matter. The moment that you filed bankruptcy you are deemed to have defaulted on your car loan and the bank has a right to “freeze your account.”

And if you thinking –as I am sure you are- what about the automatic stay? You know that powerful invisible shield that automatically activates the moment that you file a bankruptcy case and brings all attempts to collect money from the debtor to a grinding halt?! Well, in this case, not even that will save you. Don’t believe me, then check out the seminal Supreme Court Case of Citizens Bank of Marlyand v. Strumpf, decided in 1995 and see what happened to poor Mr. Strumpf. In that case, the Court made it clear, that the bank/credit union right to a setoff was more powerful than the usually invincible automatic stay. Granted, the bank initially could only “freeze the account” and then have to seek the court’s permission to actually remove that money from the account, but the end result will be one and the same…they get your money!

So once again, the easy solution, if you are contemplating bankruptcy, is to simply remove your money from the bank/credit union where you also have your mortgage, car loan, etc. and deposit that money elsewhere.

Oh, and finally, if you are wondering, what if my direct deposit check from my employer accidentally lands in the same bank account where I just cleared my money out of prior to filing for bankruptcy? The answer is post petition assets cannot be setoff. That would be an automatic stay violation. The bank cannot just take you post-petition money to satisfy a pre-petition debt. But, just because it can’t happen does not mean that it won’t happen. Heir on the side of caution and be sure that your pay checks are landing in the new bank account prior to filing for bankruptcy.

What is a Reaffirmation Agreement?

Have you just filed a chapter 7 bankruptcy case? Were you still making monthly payments on your car at the time of the filing of your bankruptcy case? If so, chances are, at some point, your bankruptcy lawyer is going to have the discussion with you over the Reaffirmation Agreement. And if he or she is not having “the talk” with you, then read this article. It will hopefully explain things.

So, at the time of the filing of your chapter 7 bankruptcy case your car was not paid off yet and you were still making monthly payments. If you read my last article Do I Get to Keep My Car if I File for Chapter 7 Bankruptcy you know that the chapter 7 trustee will not have any interest in your car. So now the only thing to consider is the role of the bank that financed your car in all of this.  Why are they insisting that you sign a Reaffirmation Agreement?

When you file for chapter 7 bankruptcy most of your debt is discharged at the conclusion of the case. Discharged is a fancy bankruptcy talk for “debt wiped out,” or to put it a more accurately, you are relieved of your personal liability on the debt. Following that line of thought, the car loan that you took out before filing for chapter 7 bankruptcy becomes a dischargeable debt. And there lies the problem as far as the bank is concerned. If you were to stop making payments on the car at some point in the future they would clearly have the right to repossess the car, but they would not be able to sue you as well on the deficiency still owed after the car is sold at auction. They do not like that. They want things to be the way they were before the bankruptcy filing. Hence, the Reaffirmation Agreement.

The bankruptcy courts have ruled in favor the banks on this issue. That is, they have agreed with the banks that if you file for chapter 7 bankruptcy, and despite the fact that  you are current on your car payments following your bankruptcy case, that gives the banks the legal right to repossess the car. And that’s where the reaffirmation agreement comes into play.

What is a reaffirmation agreement? It is the document that the banks want you to sign. It is the document that states that we will not repossess as a mere result of you filing for chapter 7 bankruptcy as long as you continue to stay current on your car payments. So there “sale pitch” is that by you signing the reaffirmation agreement it provides you with 100% assurance that you well not “get punished” by the banks for filing for bankruptcy.  Sounds like a sweetheart deal right? Wrong!

If for some reason you fall on hard times at some point after your bankruptcy case concludes and you can no longer afford to make your car payments, the car lender now not only has the right to repossess your car, but can also sue you on the balance still owed on the car loan. And that is the huge drawback to singing the agreement. Conversely, if you do not sign the reaffirmation agreement, and at some point after you bankruptcy case concludes you are no longer able to make the monthly payments, the bank can repossess your car, but (strong emphasis on the “but”) they will not be able to sue you on the balance of the loan. They will not be able to bring a deficiency lawsuit against you. The signing of the reaffirmation agreement robs you of this critical piece of “insurance.”

So what is my advice to you? Don’t sign the agreement! Despite what the law may be the reality is that if you continue making payments on time, you have nothing to worry about. The bank does not want their car back. They want you to continue making every one of your car payments on time so they can get their hands on thousands of dollars of free money (more commonly referred to as interest). The banks in 99% of instances are bluffing. They will not repossess your car just because you filed a chapter 7 case. Why do I say 99%? Well, over the years, Ford has apparently defied the odds, and done just that…repossess a car just to make a point and put the fear of God into people so that they would sign the Reaffirmation Agreement.

Bottom line, as with many other situation in life it is a cost benefit analysis. In my opinion, the benefit of NOT signing the Reaffirmation Agreement far outweighs the cost of signing one. And what if the unthinkable happens and the bank happens to repossess your car after a chapter 7 filing just to prove a point? Well, you will be amazed at just how quickly you can get a new car loan and buy a new car now that your chapter 7 case has concluded are you are debt free! Life is about calculated risks, and this is one worth taking is how I look at it.

Do I Qualify for chapter 7 bankruptcy In Virginia?

Talk about not having any manners. You have barely sat down in my office, exchanged a few pleasantries, and then seemingly out of nowhere I ask you a very personal question: How much money do you make? Or more specifically, how much gross income have you been averaging per month for the past 6 months? Why would a bankruptcy attorney be asking you this question? Because one of the decisive factors in determining whether you qualify for a chapter 7 bankruptcy versus a chapter 13 bankruptcy is income.

You determine your income by first averaging your gross income for the past 6 months.  Then, multiply that number by 12 which will give you your median income for the year.

The next key question that I will ask you is how big is your household? Meaning, how many people live in your home. Why? Because as usual size does matter.  As in, the larger the number of people in your household the more income you are “permitted” to make and still qualify for a chapter 7 bankruptcy.

With these two key pieces of information I will then review Virginia’s state median income figures to determine where you stand. At this time (end of 2012) the figures in Virginia look as follows:

Household   Size

Income

1

$52,247.00

2

$64,593.00

3

$76,012.00

4

$89,803.00

5

$97,303.00

6

$104,803.00

What do these figures mean? It means that if you are below the median income figures as determined by your household size then you automatically qualify for a chapter 7 bankruptcy in Virginia. Conversely, if you are way above the median income figure for your household size, then in all likelihood you will only qualify for a chapter 13 bankruptcy.

Because I am fond of examples, let’s say that a husband and wife are thinking about filing for bankruptcy. They have a combined income of $75,000 per year.  They have one minor child which means that their household size is three.  Based on the chart above, either one of them –or both of them- would automatically qualify for chapter 7 bankruptcy.

As for those Virginia residents who make more than Virginia’s state median income as determined by their household size, in that case the Means Test will determine their fate. I will address the issue of “passing” the Means Test in a separate article.

So what’s with these figures and where do Virginia’s state median income figures come from?  Well, these numbers are the result of the Bankruptcy Abuse Protection and Consumer Reform Act passed by Congress in 2005.  After great pressure from the banking industry that was bemoaning the fact that people were abusing the bankruptcy laws and qualifying for bankruptcy far too easily, Congress finally caved in and passed this legislation. The main purpose of the new law was to take away the power of bankruptcy judges to make their own discretion in determining whether or not someone qualified for chapter 7 bankruptcy. Now –in theory at least- it is just a matter of dollar and cents.

And finally yes, your observation is correct, each state in the United States has its own state median figures that are adjusted slightly each year.  And for once, the fact that you live in Virginia is actually helpful. Congress, when it enacted the new law in 2005 understood that where you live is just as important as how much you make.  $50,000 in Northern Virginia is not going to take you as far, as say someone living in West Virginia.  Congress is essentially giving you credit for living in a more expensive area and adjusting its figures accordingly.

So yes, call it money, mullah, scratch, the green stuff, whatever…When it comes to bankruptcy, the saying is true “It’s all about the Benjamins.”

 

 

 

What is a Preference in Bankruptcy?

Wondering how to get your mom to hate you? That’s right, I said hate you. As in, you are never invited to Thanksgiving dinner kind of hate you. And by the way, you can substitute “mom” for any other family member of your choosing. Here is how.

First, borrow a substantial amount of money from a family member and promise to pay them back. Then, when you are financially able, begin to pay back that loan to your family member. Next, declare chapter 7 bankruptcy. Finally, when we meet in my office for your initial bankruptcy consultation and I ask you a series of questions, tell me, well yes, as a matter of fact, I did pay a family member of mine a sum of say $10,000 in the past 12 months. Then, sit back and watch your mom/brother/uncle Joe get sued by the bankruptcy trustee who will demand that the money you paid your family member be turned over in order to be distributed amongst your unsecured creditors. Now at this point, you may be wondering, does the bankruptcy trustee have that much power? Can he really file a lawsuit against dear old mom? Well, in this kind of scenario, the answer is a definitive yes.

So how did it go so wrong? How did you become persona non grata (that’s just me showing off my Latin here)? Well, though it certainly was not your fault, you became a victim to a very counter-intuitive bankruptcy rule. The bankruptcy laws seek to be fair to all creditors. In that vein, the law states that the bankruptcy trustee has the power to undo “preferential payments.” One such preference that can be undone by the trustee is a payment to an “insider.” What is considered a payment to an insider? That would be any payment on a debt to a family member made within the 12months preceding the filing of your bankruptcy case.

So, if you owe 25K to five different credit card companies, and you owe your mom 10K, it is considered unjust for you to prefer your mom and pay her back in the 12 months leading up to your bankruptcy filing. The bankruptcy court’s logic is why should mom be entitled to get her money back while the credit card companies don’t get a penny? That is a preferential payment. You are favoring one creditor over another.

So, how can you avoid this unintended consequence? How do you avoid your mom disowning you? Well, the easiest way to deal with this issue is to simply know this rule in advance. Immediately stop paying any more money to your family member and wait 12 months before filing your bankruptcy case. The other thing to keep in mind is the amount of money that you have paid back to your family member in the months leading to your bankruptcy filing. If the sum is only a few thousand dollars, the bankruptcy trustee is not very likely to go after your family member for this fairly insignificant amount of money.

And what if he does? Well, mom can attempt to settle out of court and offer the bankruptcy trustee an amount that is smaller than the one that she received from you. And in order to get back in to your mom’s good graces, you can still pay her back after your bankruptcy case concludes. You have the right to pay back any of your creditors AFTER your bankruptcy case concludes.

One thing you should absolutely positively not do is inadvertently not mention or “forget” to inform your bankruptcy attorney of these payments to your family members. Why? Because your case can be dismissed by the court, leaving you with a filing of a bankruptcy on your credit report without the benefits of wiping out your debts. Plus, you may be brought up on criminal charges of perjury which may lead to possible jail time. And then, mom would really be upset with you.