By Ryan C. Wood

Not all banks will treat you the same when you run into some financial difficulties (Wells Fargo Bank). For your whole life you have no issues and then you run into trouble and your bank abandons you or penalizes you for filing bankruptcy. Some banks will close your bank accounts after you file for bankruptcy protection (San Mateo Credit Union). Our only real voice is life is voting with our money. So, please choose how and where you spend your money or deposit your money carefully.

For years now Wells Fargo has had the policy to freeze the bank accounts of their customers who file for bankruptcy protection. When Wells Fargo does this it prevents the bankruptcy filer from using their own money to live and pay bills. Way to kick someone when they are down. For years now the case of Mwangi has been trying to determine if Wells Fargo is not allowed to freeze accounts. The Ninth Circuit Court of Appeals recently held in In the Matter of Mwangi (No. 12-16087, August 26, 2014) that Wells Fargo can continue to freeze bank accounts and it is not a violation of the automatic stay.

Ninth Circuit Court of Appeals held Wells Fargo can freeze bankruptcy filers bank accounts.

The problem is that once someone files for bankruptcy protection the automatic stay takes effect stopping any and all collection activity. So how can Wells Fargo freeze an account after a bankruptcy case is filed? Wells Fargo is violating the automatic stay right? Wells Fargo is arguing that they are preserving assets of the bankruptcy estate even though that most of the time a bankruptcy filer can exempt the money in their bank accounts from the bankruptcy estate. Exempting the assets means the bankruptcy filer has a right to keep the asset and the assets do not become property of the bankruptcy estate for the benefit of creditors. A creditor or party in interest can object to a bankruptcy filer’s claim of exemptions up until 30 days after the date of the first schedule meeting of the creditors. Even though an asset is exempted the Ninth Circuit Court of Appeals held a bankruptcy filer has no right to possess the exempted funds until after the deadline to object has passed.

What? So Wells Fargo is not violating the automatic stay by freezing bank accounts because the bankruptcy filer has no right to possess the exempted assets until after the deadline to objection to the exemption has passed? Well, each and every bankruptcy filer has to use the exempted money in their accounts to live and eat long before the deadline to object to the exemptions passes in almost every case. In theory a bankruptcy filer may receive post-petition income that is not part of the bankruptcy estate to pay their living expenses after the case is filed. What if someone gets paid once a month? They have no right to use and possess the money in their accounts until they get paid again? While the Ninth Circuit Court of Appeals holding in Mwangi was focusing on whether there was a violation of the automatic stay the holding could lead to undesired results.

I seriously doubt most bankruptcy attorneys advise their bankruptcy clients that they cannot do anything with their assets that are exempted from the bankruptcy estate. In theory a bankruptcy filer should not even be using their car to go to work until the deadline to object to the exemption passes. What if the bankruptcy filer is in a car accident after the case is filed and a creditor or trustee objects to the exemption of the car and is successful? Now the property of the bankruptcy estate has been damaged post-petition to the detriment of the bankruptcy estate and creditors. With a vehicle there will be insurance to cover the damage and in theory fix the damages, but what if the bankruptcy filer has no insurance for the car or what about other assets that do not have insurance coverage? Should bankruptcy lawyers be advising clients to not use any of their assets until the deadline to object to the claimed exemptions has passed? Do not sit on your couch because you may damage it and you have no right to possession of the couch until the deadline to object to exemptions has passed. If you damage the couch and the trustee successfully objects to the exemption used to protect the couch the trustee now has an argument that you damaged estate property to the detriment of creditors? Come on now. I may be missing something, but the Ninth Circuit Court of Appeals clearly held “that before the account funds revested in the debtors, they remained estate property, and the debtors had no right to possess or control them.” Time will tell if this holding has consequences not intended.