Automatic Bank Freezes: Protecting Estate Assets or Impeding Consumer Debtors’ Rights?

November 2010Articles American Bankruptcy Institute Journal

A decision this summer by the Ninth Circuit Bankruptcy Appellate Panel (BAP), In re Mwangi, cast light on what has been a vague area of law under the Bankruptcy Code. Mwangi addresses whether a bank, without a right to setoff a pre-petition mutual debt against a chapter 7 debtor, can impose an administrative freeze on the debtor’s bank account, including exempted funds. The issue exposes a conflict between the turnover and automatic-stay provisions of the Bankruptcy Code and highlights the balance between protecting the estate against the interests of the debtor.

One national bank in particular, Wells Fargo, has been at the forefront of the debate, as its policy of automatically freezing debtors’ accounts has drawn the focus of multiple opinions. Wells Fargo has maintained the policy for several years, and the practice has become more widespread since the bank’s acquisition of Wachovia in 2009, extending the specter of administrative holds into regions where Wachovia has a strong presence.

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