Legal Definitions - administrative freeze

An administrative freeze occurs when a bank temporarily blocks a customer's access to their bank account after learning that the customer has filed for bankruptcy. This action is typically taken because the customer (now a debtor in bankruptcy) also owes money to the bank, beyond just having funds on deposit. The bank implements the freeze to prevent the debtor from withdrawing funds that the bank might have a legal right to use to offset the debt owed to it.

Examples:

• Imagine Sarah, a small business owner, has a checking account with "First National Bank." She also took out a business loan from First National Bank a year ago. When Sarah's business faces severe financial difficulties and she files for Chapter 7 bankruptcy, First National Bank receives notification of her bankruptcy filing. Immediately, the bank places an administrative freeze on Sarah's checking account. Even though there are funds in the account, Sarah cannot make withdrawals because the bank wants to protect its potential right to use those funds to reduce the outstanding balance on her business loan.

• Consider David, an individual, who has a savings account with "Community Credit Union." David also carries a significant balance on a credit card issued by Community Credit Union. When David files for Chapter 13 bankruptcy to reorganize his debts, the Credit Union is informed. In response, Community Credit Union implements an administrative freeze on David's savings account. This prevents David from accessing his savings while the Credit Union assesses its legal options regarding the credit card debt and whether it can legally apply the funds in the savings account against that debt.

• Suppose "Global Logistics Inc." maintains its primary operating accounts at "MegaCorp Bank." The company also has a substantial line of credit with MegaCorp Bank, which it has drawn upon heavily. Facing insolvency, Global Logistics Inc. files for Chapter 11 bankruptcy. Upon receiving notice of the bankruptcy filing, MegaCorp Bank places an administrative freeze on Global Logistics Inc.'s operating accounts. This action ensures that the company cannot deplete the funds in those accounts, which MegaCorp Bank might seek to apply against the outstanding balance on the line of credit, pending court approval or further legal proceedings in the bankruptcy case.