Banks Can Freeze Bankrupt Consumers' Accounts
The U.S. Supreme Court has given banks permission to freeze the accounts of bankrupt customers who have defaulted on loans made by the banks. The case involved a man who had taken out a car loan. When he filed for bankruptcy, he stopped payments on the loan, which had a remaining balance of over $5,000. In turn, the bank froze his checking account, which had a balance of $3,500. The bank did not seize the money. It merely placed a hold on the account so that the man could not spend any more of the funds. The man claimed this action violated the automatic stay.
The bankruptcy court agreed that the account should not be frozen and released the bank's hold. Later, it ruled that the bank had a right to the remaining funds in the account to offset the loan balance. However, the man had reduced the account balance to zero.
In reviewing the case, the Supreme Court said it was absurd to make the bank pay the man when the man actually owed the bank money. It was undisputed that under state law the bank had the right to set off the defaulted loan against the balance of the checking account. The temporary hold, meant to keep the money in the bank until the court said the bank could either set off or not, did not violate the man's bankruptcy rights, the Court said. The bank wasn't taking control of the property. It was merely holding off on its promise to pay out from the account until the court had determined who was the rightful owner of the money.
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The key here is that the bank did not take the money to pay off part of the loan right away. It merely attempted to hold the account balance until the court had decided where the money should go. Unfortunately, the court ruled the money should be released before it determined if 7whether the bank could use the money to set off the balance of the loan. In the future, banks will be able to avoid this situation, thanks to the Supreme Court's ruling.
Case: Citizens Bank of Maryland v. Strumpf 116 SCt 286, 10/31/95
Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter.
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