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Terry L.
Terry L., Attorney
Category: Bankruptcy Law
Satisfied Customers: 2501
Experience:  Better Business Bur 15yrs bankruptcy experience. Chicago Bar
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I filed for bankruptcy Chapter 7 last Thursday. When I filed,

Resolved Question:

I filed for bankruptcy Chapter 7 last Thursday. When I filed, my bank account had $5700 in it, which is covered by exemption. The bank account I had also had a Line of Credit account, which I owed $10k on, and was included in my petition.

Today I logged into my bank account to see that my $5700 was gone. I called the bank and they said they have an "administrative hold on the money". They stated that they have filed a petition with the court stating that "the money was in our account pre-filing and would like the courts permission to use the money towards the Line of Credit".

I told the bank that the Automatic Stay protection should be in effect and that the money should be protected and not taken from us. The bank disagreed stating that the money was in the account pre-filing.

Can someone please explain to me what the bank is doing here? And what is the timeline for the courts decision on this? I thought our money was protected once we filed.
Submitted: 4 years ago.
Category: Bankruptcy Law
Expert:  Terry L. replied 4 years ago.
This is the rule of setoff.
That rule, states that any asset/funds in the creditors control can be used to satisfy the debt owed. This is a sticky situation.
Depending on what the creditor does, it is possibly a violation of the automatic stay. However, the lender can freeze the account, since the asset secured by the amounts owed. Ultimately, you may lose the money, as it is not feasible to pay the creditor fair market value of the asset held, here the money, so you might lose the money.

One major case on point states :
Citizens Bank of Maryland v. Strumpf, 116 S.Ct. 286 (1995)
    Administrative hold is not a setoff, i.e., no violation of stay

Therefore, by freezing the account, the creditor may not be in violation of the automatic stay.

Some guidance can be found on the USTrustee site, which says:
http://www.usdoj.gov/usao/eousa/foia_reading_room/usam/title4/civ00066.htm
Quote:
Q. Setoff And The Automatic Stay. Setoffs found to violate the automatic stay do not justify denial of an otherwise valid right of setoff. Instead, violations of the stay are punished under § 362(h), which does not authorize denial of setoff as a sanction. At best the debtor should be entitled to damages suffered on account of the stay violation which should be zero unless the debtor was willing and able to provide adequate protection for the creditor's security interest in the amounts held subject to setoff. 11 U.S.C. §§ 506(a), 363(a),(c)(2), and (e); see generally In re Hudson, 168 B.R. 449, 453 (Bankr. S.D. Ga. 1994) (court finds IRS withholding is a violation of the stay but permits setoff nonetheless; violation of stay only entitles debtor to recovery under § 362(h)); In re Midway Indus. Contractors, Inc., 167 B.R. 139, 144 (Bankr. N.D. Ill. 1994) (offset in violation of the stay is not "sufficient reason to deny the [IRS] the modification of the stay" -- court sanctions IRS under ??(h) instead), rev'd, 178 B.R. 734 (N.D. Ill. 1995) (IRS adjustments are not setoff; § 362(h) does not apply to corporate debtors); In re Lough, 163 B.R. 586, 589 (Bankr. D. Idaho 1994) (??(h) does not allow for sanctions for freezing funds even if a technical violation of the automatic stay); In re Custom Ctr., Inc., 163 B.R. 309, 318-19 (Bankr. E.D. Tenn. 1994) (withholding funds, even if a violation of the automatic stay, does not justify denial of otherwise valid right of setoff); In re Gribben, 158 B.R. 920 (S.D.N.Y. 1993) (setoff without relief from stay a mere "faux pas" and does not justify denial of an otherwise valid right of setoff). But see In re Operation Open City, Inc., 148 B.R. 184 (Bankr. S.D.N.Y. 1992), aff'd 170 B.R. 818, 825 (S.D.N.Y. 1994) (setoff in violation of stay is void and warrants turnover order against creditor).
Customer: replied 4 years ago.
Thank you... that kind of explains it but I am still a bit confused. I understand the bank may be following the law with the administrative hold, but I am surprised my lawyer never even mentioned setoff to me before we filed.

My question really comes down to the "setoff" though. How is it that the bank can do a setoff post-filing? What are the chances the court will grant the money to the bank, and why? And why didn't my lawyer tell me to move the money to a different bank before we filed? He didn't seem concerned about it the day we filed.

Any more info about setoff would be great and I will Accept your answer.
Expert:  Terry L. replied 4 years ago.
Setoff is allowed based on the pre-filing arrangement, (see the small print in the credit card docs) You agree to them setting off if you have a bank account with the same company. Think of the old addage: possession is 9/10s of the law. Here, they have possession (it's their bank). I advise my clients to change banks before filing any time they have a debt with their depository bank, just to be safe. I'm sorry to hear this happened to you. It might be possible for your lawyer to try a turnover motion, it's the least he can do, even if it might be denied....worth a shot.
Customer: replied 4 years ago.
Last quick question on this... you said pre-filing. Does that mean the bank is NOT entitled to any deposits post-filing? What about a deposit on the DAY of filing? Are they allowed to put an administrative hold on those deposits?
Expert:  Terry L. replied 4 years ago.
Any money held in the account is subject to setoff.
The bank can put an administrative hold on the account to determine their ability to setoff. It is arguable that monies put in after the case is filed would not be subject to setoff. You will need to have your lawyer get with the bank to disect this with the timing of the case.
Terry L., Attorney
Category: Bankruptcy Law
Satisfied Customers: 2501
Experience: Better Business Bur 15yrs bankruptcy experience. Chicago Bar
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