Why Chapter 7 Debtors Should Beware Wells Fargo
UPDATE: Wells Fargo's practice of placing "administrative freezes" on debtor's accounts has been rebuked by the Ninth Circuit Bankruptcy Appellate Panel. See our updated discussion of this case at the end of this article.
Upon filing a Chapter 7 Bankruptcy petition, a debtor's assets become the "Bankruptcy Estate." We devote considerable space to this topic elsewhere on this site, where we explain that in Chapter 7, any assets that the debtor will keep through the bankruptcy must be protected by an applicable exemption. If an asset is not exempt because the debtor has exhausted his or her exemptions covering other assets, then the Chapter 7 Bankruptcy Trustee will seize the property, liquidate it, and distribute the proceeds to the debtor's unsecured creditors. The vast majority of Chapter 7 cases, however, are "No Asset" cases, meaning that there are no assets over and above what the debtor can keep. Our bankruptcy attorneys help our clients determine whether their assets will be protected by the available exemptions prior to filing a Chapter 7 case.
Despite this fact, Wells Fargo Bank is fond of placing an "administrative freeze" on all accounts of every Chapter 7 debtor as soon as they receive notice of a Chapter 7 bankruptcy filing. They claim that they are "required by operation of Sections 541 and 541 of the Bankruptcy Code" to freeze debtor's accounts. However, freezing accounts requires an expansive reading of these sections that to our knowledge no other major bank applies. In other words, what Wells Fargo is saying is that until they hear from the Chapter 7 Trustee assigned to the debtor's case that the money in the debtor's bank account at the time of filing his or her Chapter 7 case is actually exempt, then they will not allow the debtor access to his or her own funds. Until the trustee reviews the debtor's petition sufficiently to determine if that money is exempt and then informs Wells Fargo of this, however, the debtor is denied access to his or her accounts, even automatic direct deposit payments. The debtor's wait to regain access to his or her money may take anywhere from shortly after we request that the trustee do this, to after the debtor's 341 Meeting of Creditors when the trustee, which could be around five weeks after the filing of the case.
These punitive account freezes at best cause an undue burden on the great majority of No Asset Chapter 7 Debtors at best, and at worst, potentially serious harm, if for example, the debtor is unable to access funds to pay rent or a mortgage. We take a very skeptical view of Wells Fargo's freezing of accounts and their purported justification for them. Because Wells Fargo is the only major bank that routinely imposes such freezes on Chapter 7 debtors, we believe that Wells Fargo's rationale is disingenuous and that their true motive is to maximize the gains they can make on short term investment of funds that are frozen. Multiply this across tens of thousands of customers filing Chapter 7 bankruptcy nationally every year, and one can readily ascertain that Wells Fargo is maximizing its profits at the expense of their customers who file Chapter 7 bankruptcy.
What should you do? While we do not advocate closing bank accounts prior to filing bankruptcy, we do strongly encourage our Chapter 7 clients to have another checking account at another financial institution into which they can have their earnings from employment, social security or other regular income deposited, and from which they can continue to make ongoing bill payments such as rent or mortgage payments. Further, we believe that Wells Fargo should bear some cost for the harm they cause their customers. We strongly encourage our clients post bankruptcy to consider ceasing to do business with Wells Fargo by not banking with them. We encourage our San Jose Bankruptcy clients to bank with small, community based banks, who generally are more accountable to their customers and offer better customer service.
UPDATE: In the case of In re Mwangi, Case No. 09-1408 (9th Cir. B.A.P., June 30, 2010), the Ninth Circuit Bankruptcy Appellate Panel held that Wells Fargo's policy of freezing debtors' accounts violates the Automatic Stay in violation of Bankruptcy Code section 363(a)(3). The Court roundly rejected Wells Fargo's arguments, stating as follows:
"Wells Fargo asserts it did not exercise control over property of the estate. We disagree. Wells Fargo could have paid the account funds to the trustee; it did not. Wells Fargo could have released the account funds claimed exempt to the [debtors] when demand was made; it did not. Wells Fargo could have sought direction from the bankruptcy court, by way of a motion for relief from stay or otherwise, regarding the account funds; it did not. Instead, it chose to hold the funds until a demand was made for payment that it alone deemed appropriate. If that is not exercising control over the funds, we don't know what is."
Now that this opinion has come down, we will aggressively file an adversary acton for violation of the Automatic Stay in every case in which any of our clients have an account frozen, should Wells Fargo stubbornly continue its policy of freezing accounts.