Bank accounts can get frozen for a variety of reasons. Banks or financial institutions can freeze your bank account if they suspect any fraudulent transfers from your account. Or when a credit card company or a debt collector has a court judgment against you. Also when you have unpaid debts like the student loans or unpaid taxes to the government, your bank accounts are likely to get frozen.
Once the bank account is frozen, you cannot make withdrawals but can only put money in your account until the freeze is lifted. Joint accounts can get frozen too.
Since banks usually do not notify you before freezing your account, it can be one of the stressful experiences, especially when you find out while making purchases at the store or the ATM, or during an urgent need of money. This is because banks are authorized to freeze your account immediately without even informing you after receiving a levy notice.
The judgment creditors are not liable for notifying you before obtaining a judgment. However, a creditor needs to inform you about the lawsuit filed and judgment against you. This may not be always the case. You may discover the court case only when your bank account gets frozen.
What should you do when your bank account is frozen?
Different rules may apply for different reasons on why your bank account got frozen. In suspected fraud transactions, you may resolve the issue by contacting your bank to verify your identity. Unusual large purchases can be flagged by your bank. Making purchases abroad without warning using your credit card or debit card could be flagged as being stolen. To protect your account, the bank may freeze the account unless you contact them and prove your identity.
Read more on tips to avoid fraudulent money transfer.
It is a different story when the account is frozen due to a judgment creditor. Your money could be at risk. Creditors can collect your money as part of their debt-collection tactics to satisfy the judgment. Having a lawyer has proven to be successful in unfreezing your account but you need to take the necessary steps as soon as possible.
Filing for Bankruptcy
If you file for bankruptcy as soon as you are informed about the court judgment, you can prevent the creditors from collecting your money. Filing bankruptcy halts all collection activities due to the "automatic stay". It will also suspend the wage garnishment. However, it will not unfreeze your frozen bank account. You need to provide proof of the bankruptcy filing to the Sheriff who is in charge of freezing the account via the court order. Proof has to be shared with the bank also. This will help in informing the Creditor's attorney that the bankruptcy has been filed.
Keep in mind that, once the account is released, the funds in your bank will be included in the bankruptcy estate.
How to unfreeze a bank account?
Vacating the Judgment
In order to file for a Motion to Vacate, consult with a debt-collection defense attorney. Gather all the necessary information about the judgment creditor, their law firm (you can contact your bank for the details), the index number of the case. Your attorney will help you in filing the motion to vacate or an Order to Show Cause. Both parties would have to appear in court. If the Judge is in your favor, the judgment will be vacated and the case will be dismissed. Then your bank account can be released.
In the absence of a court judgment, creditors or debt collectors do not have the authority to freeze your account.
Funds exempted from Debt collection via Automatic Protections
Government benefits like Social Security, Disability Benefits, etc have automatic protections. If the funds in your bank account are exempt, your account cannot be frozen even when there is a judgment against you. You can demand an immediate release by notifying the judgment creditor's lawyer that your funds in the account are exempted from debt collection.
Be prepared for any delay in getting your account release. It is recommended that you file a Claim of Exemption to vacate the judgment even in case of exempt funds as soon as you get notified of the default judgment.
There is a law in New York called the "Exempt Income Protection Act" (EIPA) that allows people to have access to certain amounts of money for necessities of life when the account remains frozen. Your account cannot be frozen if your bank finds out that you have the cutoff amount or less of the non-exempt funds. Any amount above the cutoff can be taken.
The cutoff is raised if your bank finds that you have exempt funds along with non-exempt funds (wages, savings, dividends) in the bank account. If there is less than the cutoff, the account cannot be frozen.
The process of accessing the protected funds may vary from bank to bank. Consult with your concerned bank for a detailed explanation.
If your account is frozen due to suspicious activities, you can simply call up your bank and resolve it. If it is frozen due to any other reason that involves debts and bankruptcy, the best step to take is to go to the court and vacate the judgment at the earliest to unfreeze your account quickly. Though you can attempt to come up with some form of repayment options or alternative repayment plans with your creditor, it can be time-consuming to try to settle the matter outside the court.