Why Do Banks Freeze or Close Accounts?
Banks in the U.S. have to obey a very complicated system of federal laws. Federal banking laws require banks to protect customer security. Banks have to cooperate with criminal investigations. They have to obey court orders about debt collection. The laws also hold banks responsible if one of their accounts is used for criminal activity. Bank officers can be personally fined or sent to jail if they don’t report suspicious activity or stop it when they can. To protect themselves, banks will cut off accounts that could possibly be involved in crime, even if there is no proof.
Banks have a lot of leeway to freeze or close accounts on a case-by-case basis. When you opened your checking or savings account, you signed a customer agreement, and banks usually put language into these agreements that says they can restrict or close your account at any time, for any reason or no reason. If you didn’t keep a copy of your customer agreement when you opened the account, we’ve collected links below where you can download customer agreements for the top five retail banks in the U.S.
There are two different ways your bank might block your account: by freezing it or by closing it. Make sure you know which situation you’re dealing with. Whether your account is frozen or closed makes a big difference in your options for solving the problem and in how long it can take to get access to your money.
We’ve listed below the most common reasons why a bank might freeze or close your account. Some of them can be cleared up with a phone call while others will require you to send in paperwork or get a lawyer. Unfortunately, there are also some freezes or closures you might not be able to do anything about.
For Your Security
A security freeze on your account is for your protection. If your bank notices purchases that don’t fit your normal pattern, it may suspect that your account was hacked or your wallet was stolen and put a temporary freeze on your account to keep your money safe.
You might find out about this freeze while you’re standing at the checkout counter or trying to buy something online. It’s embarrassing, but remember that these things can happen to anybody. A security freeze can usually be cleared up with a phone call to verify you are the one making the purchase.
You might get a notice in the mail about a security freeze. The notice will contain instructions on your next steps. In some cases, your bank’s fraud department will call you to verify your recent transactions.
But be very careful! According to U.S. News & World Report, scammers may contact you pretending to be your bank’s fraud department. They will try to trick you into giving them access to your bank account. Never click on any links in an email that says your bank account is frozen. Never give out your Social Security number, bank account number, or PIN number to a caller. Don’t call any phone number given to you.
Instead, find your bank’s fraud department number on the back of your debit card or on your statement and call directly. You can also use the list below of customer service links for major banks. If you get a notice or call about a security freeze that your bank didn’t send, keep an eye on all your credit and bank accounts. It’s a good idea to take precautions against identity theft.
For Unpaid Debts
A creditor can get a court order and force your bank to freeze some or all of your account. Creditors can freeze up to two times the amount you owe, and if your debt is bigger than your account balance, they may freeze the whole thing.
Creditors can freeze your account for any type of debts, including:
Car loans and personal loans
Judgments or liens from civil lawsuits
It may not even be your debt! If you have someone else’s name on a joint account with you, and that person owes money, your account could still get frozen.
For Suspicious Activity
A bank can either freeze or close your count for suspicious activity — the results will be different depending on which the bank chooses.
To prevent money laundering and terrorism, federal banking laws require that banks report certain types of suspicious activity to the Treasury Department. Most people have nothing to do with terrorists or organized crime, but certain patterns of behavior or dollar amounts can be automatic red flags in the banking system.
Suspicious activity can also mean passing bad checks, receiving money from crimes, hiding or holding money for someone who’s in trouble, making transactions with questionable people, or being investigated or convicted of a crime.
You might not do any suspicious activities yourself, and the suspicious transactions might not have happened in the same account that you’re dealing with. You could get flagged for transactions that “fit the profile” but are totally legitimate. You could be the victim of check fraud or account hacking. You could have a joint account with someone else who is in legal trouble or who had suspicious activity in a different account.
Many different activities can trigger a freeze:
Large deposits and withdrawals from an unknown source. If there’s a lot of money going in and out of your account that isn’t from a recognizable job or if you didn’t list an employer when you opened the account, that can look suspicious.
False or misleading information in your customer record. Make sure you give a valid address and phone number when you open the account. If you move or your number changes, update the bank as soon as you can. A disconnected phone number is a red flag.
Withdrawals against a returned check or a pattern of depositing returned checks. Be very careful about getting paid by check. If you deposit a check that turns out to be worthless, it could trigger a freeze on your account. If you cashed the check or withdrew some of the money, the bank may think you are committing fraud on purpose.
Large transfers of money, especially overseas. Banks have to monitor transfers and report on specific dollar amounts, like $5,000, $10,000, $25,000, or $50,000. If you make transfers like that, or if you make a series of transactions that add up to one of those amounts, it’s a red flag.
Frequent cash transactions. A lot of honest people get paid or tipped in cash. Unfortunately, criminals prefer cash too.
Multiple accounts in the same name, or frequent transfers. If you have a lot of different accounts, especially if you move money between them frequently, the bank will wonder why. Federal law limits you to six withdrawals from savings accounts per month. If you often bump up against this limit, it can look suspicious.
Deposits from questionable sources. If you’re receiving money from a person or a business with suspicious activity, it can trigger an investigation
A sudden increase in activity. If your normal pattern of deposits and purchases goes up dramatically, either in frequency or in dollar amounts, the bank may become wary of you.
Buying high-risk items or large cash withdrawals. Some people like to save up for big purchases and pay cash, but this may cause the bank to wonder if you’re laundering money. Buying high-risk items like guns, coins, precious metals, or art raises the same question.
Out of state or foreign activity. If you don’t live or work in the same city where your account is located, it can trigger a freeze.
Reports of suspicious activity from other banks. Banks report customer problems and closed accounts to a central agency called ChexSystems. If you had a problem with one bank, it can affect all your accounts.
Suspicious activity freezes can be the trickiest to deal with. Sometimes law enforcement forces the bank to place a freeze. If there’s an ongoing legal investigation, the bank may be under a gag order and your customer service representative may not know what’s going on or it might be illegal for them to tell you. However, if the freeze is based on just one problematic transaction or a recent pattern that got red-flagged by coincidence, you may be able to clear it up by showing where the money came from and what it was for.
A red flag on your account can trigger a freeze, but if you can show your transactions are legal it can usually be cleared up. Some banks won’t take a chance — they might just close your account at the first whiff of trouble. Remember, the broad discretion built into those customer agreements lets them close an account at any time.
In addition to all the suspicious activities that can trigger a freeze, the bank may close your account if you fit a profile of behavior:
You’re convicted of a crime. Some banks will refuse accounts to customers with a criminal record. But if you had a previous conviction and the bank finds out, or if you’re convicted while you’re a customer, they can close your account.
You’re in a business considered high-risk. Banks may close or refuse to open accounts for people in certain lines of work, even if the business is legal in the state where they live. In 2011, the FDIC published a list of business categories that banks were supposed to monitor, and a lot of banks just refused to open accounts for those businesses at all. The FDIC took down the list in 2014, but some banks still don’t like to work with these businesses. Potential red-flag businesses include:
Gun, ammunition, and firework dealers;
Online gambling, escort services, and pornography;
Payday lending and check cashing;
Medical or recreational marijuana and drug paraphernalia;
Telemarketing and some multi-level marketing systems;
Home-based charities and advisors on getting government grants.
For Administrative Reasons
Banks, like any large company, go through reorganizations. They may close down your branch or stop doing business in your state.
Your bank may also close your account if it is dormant, meaning you haven’t used it for a long period of time. Depending on what state you live in, an account may go unused for three to five years before it’s considered dormant. You may get a notice that the bank wants to close a dormant account, but if you’ve moved they may not be able to reach you. You can keep your accounts from going dormant with a few simple steps: review all your accounts regularly, set up automatic transfers in or out of the account, and make sure the bank has your contact information up to date.
For Financial Problems
There’s a phrase in most bank account agreements that says the bank reserves the right to close your account if it believes there is a risk of loss or liability, meaning your account will be closed if your financial problems are costing the bank more money and hassle than it can make off of you. It really seems like being kicked when you’re down, but the bank does have the legal right to do it.
There’s a wide range of problem financial events that can trigger the bank to close your account:
Too many bounced checks or overdrafts — and they get to decide how many is “too many” on a case-by-case basis. (suggested article: How Much Can I Overdraft My Checking Account? The Answer…)
Too many transfers between accounts. As we explained above, there are legal limits on transfers between some kinds of accounts. Even if you’re under the legal limit, the bank can still shut down your account if they think you’re making too many transfers.
Too many deposits of checks that get returned unpaid. This could happen to anybody once or twice, but you should be very careful who you accept checks from in order to stay in good standing with your bank. (suggested article: Penalty for Cashing a Check Twice: Banks Fees, Legal Claims, & More)
A zero balance or a negative balance. If you owe the bank money or the account is sitting empty, you can be shut down.
What Happens to Funds in a Frozen or Closed Account?
The answer to what happens to your funds depends on whether your account was frozen or closed.
A frozen bank account can still accept deposits, but the new money will probably get frozen too. It’s important to change your direct deposits right away. If your paycheck deposit has already been sent but hasn’t posted to your account yet, see if your employer will work with you to cancel or reverse it. As the payer, they may have more influence with the bank to release the money back to them.
In most situations, the law protects you from having federal benefits (like Social Security) frozen — the Consumer Financial Protection Bureau has published a full list of such protected benefits. If you owe money to the federal government, like taxes or student loans, or if you have unpaid child support, the law may not protect you. Even if your benefits are protected, you might need a lawyer to help you get the money.
There’s no law that limits how long a freeze can last, and banks don’t publish policies on how they make decisions about account freezes. How long your money is tied up depends on your individual situation and the judgment call of the officers at your bank.
If the freeze is for your protection or is easily cleared up, the bank will normally release your account as soon as you get in touch and verify the right information. If your account is frozen because the bank is investigating your transactions, freezes typically last about 10 days for simpler situations or around 30 days for more complicated situations. But because there are no hard-and-fast rules on this, it’s best to assume it could last a long time. Get a backup plan in place as soon as you can.
If the freeze was placed because of a legal investigation, the account must remain frozen until law enforcement lets the bank release it. If your account was frozen for debt collection, the court decides when to lift the freeze. You may be able to get access to part or all of your money by negotiating a payment plan with your creditor.
The bank has to return your money when it closes your account, no matter what the reason. However, if you had any outstanding fees or charges, the bank can subtract those from your balance before returning it to you.
The bank should mail you a check for the remaining balance in your account. Your notice letter about the account closing should tell you when to expect your check — usually within ten days. How to get money from a closed bank account is a matter of cooperating with the bank who will be looking to get your money back to you.
If it doesn’t state a time frame, or if your money doesn’t arrive on time, call the bank to follow up. You may need to call several times to get a good answer. When a bank closes your account, it isn’t trying to impress you with great customer service. Sending out your check isn’t a high priority. Be persistent, and you’re more likely to get that check quickly.
What Happens Next?
Banks block your account first and notify you afterward. That means you’ll probably find out that your account is frozen or closed at the worst possible time — when you’re trying to make a purchase or when a check bounces. Try not to panic. Most of the time, this is a temporary inconvenience that you can straighten out pretty easily.
The first thing you should always do is get in touch with your bank. If you already have written notice, there may be more information about which department you should contact or a case number. If you have any reason to suspect the notice isn’t real, call the fraud number on the back of your bank card or call customer service directly. We’ve listed the customer service links for five major banks in the next section.
If you can’t get the problem corrected immediately, you need to make sure you’re not going to bounce any more checks or have any deposits going into a frozen account. You don’t want to rack up fees or lose access to any more of your money. A freeze or account closure might not hurt your credit, but bounced checks and declined payments will.
Call your payroll department right away, and change your direct deposits to a different account or have them cut a paper check. Do the same with any benefit agencies or family members who might send money into your account.
Look over your records for any checks you’ve sent out. Call the payee to make sure they don’t try to cash that check, and set up a different form of payment. You’ll also need to change any regular bills that are set up to auto-pay from that account.
Keep copies of all notices and letters from your bank about the situation. Take notes of every phone call, and write down the name and ID number of every person you talk to. Every piece of information might help solve the problem or clear your record later.
If Your Account Is Frozen for Your Security
Most of the time, a simple conversation with the bank’s fraud department will solve a temporary security freeze.
If your account has been hacked or your identity stolen, the bank will work with you to report it. Check your last several bank statements carefully, and keep an eye on them going forward. There are legal limits to how much money you can lose to ID theft, based on how the thieves got access and how soon you reported it to the bank.
Your loss is $0 if you report the theft before any transactions are made. If the bank allows any fraudulent transactions after you make a report, they have to reimburse you. They also have to reimburse you if you still have your debit card and your account was hacked, as long as you report it in the first 60 days after your bank statement is sent.
Your loss is limited to $50 or less if you report it within 2 days of finding out.
Your loss is limited to $500 or less if you report it more than 2 days after finding out but less than 60 days after your bank statement is sent.
You could lose your whole balance if you don’t report it until more than 60 days after your bank statement is mailed. You could also lose the balance in any linked accounts.
You’ll also need to report ID theft to the police, the Federal Trade Commission, or both. The FTC has published a checklist on what to do if your identity is stolen. You can also use its online reporting tool.
If Your Account Is Frozen for Unpaid Debts
Here’s what you should do if your bank account is frozen for a debt or judgment:
Find out who the creditor is. The bank may not give you information about the debt, but it should tell you who got the order for the freeze. If it’s not listed on the notice from the bank, call and find out.
Get legal advice. If you can’t afford a lawyer, you can find legal aid near you. If you’re in the military, you can get help at your local JAG office.
Consider credit counseling. A credit counselor can help you plan a realistic budget and come up with a payment plan. The court may release the freeze on your account if it accepts your plan. Find out more about working with a credit counselor.
Find out more from the Consumer Financial Protection Bureau about judgments and liens on your account.
If Your Account Is Frozen or Closed for Suspicious Activity
Your bank may be able to tell you what specific transactions triggered the freeze and will walk you through what documentation could help unfreeze your account. Cooperating with them is usually the fastest way to solve the problem.
If your situation is more complicated, you may not be able to get a straight answer about the reason for the freeze or how to solve it. If you own the account jointly with anyone else, talk to them and see if you can discover anything that raised a red flag with the bank. Look over your past few months’ transactions and make sure you recognize them all.
If you can’t find out a specific reason for the freeze, or you think it was done in error, you should get legal advice. How long can a bank account be frozen? There is no time limit.
Being reported for suspicious activity is serious. A closed account can affect you, anyone you have a joint account with, and possibly anyone you paid or did business with. The closing will be filed as Reported Information to ChexSystems and could trigger all your other accounts to get frozen or closed. The report will stay on your file for five years, and it can seriously damage your ability to open another bank account.
If you can find out what suspicious activity triggered the closing, try to clear it up as quickly as possible. It’s not likely that the bank will re-open your account, but if you can show your transactions were legitimate or that you were the victim of someone else’s bad actions, it’s possible.
If your account was closed by mistake or because of someone else’s actions, you should get legal advice. You can also dispute the information with ChexSystems or add a statement to your file.
If your bank account gets closed can you reopen it? With nearly every bank, yes. They will be happy to reactivate your account once you get in good standing again.
If Your Account Is Closed for Administrative Reasons
If your bank is reorganizing or changing operations or if an account went dormant, you haven’t done anything wrong. It shouldn’t affect your credit report or your customer profile in ChexSystems.
It’s a good idea to look at your ChexSystems report, just to make sure the information is correct. You’re entitled to one free report each year. Request your annual Customer Disclosure Report from ChexSystems.
If Your Account Is Closed for Financial Problems
If you bounce a check, overdraw your account, or have an account closed for cause, it may show up on your ChexSystems profile as “Reported Information” or a “Reported Event.” Reported Information stays on your file for five years.
If your bank closes your account for financial problems, it probably won’t re-open it. You may also have trouble getting a new account at another bank.
You can dispute incorrect information in your ChexSystems file. If the Reported Information is true, there’s nothing you can do to get it removed. If you pay back any money you owe the bank, the bank has to add that update to your file. It’s possible they might get ChexSystems to clear your file. They don’t have to do it, but you can ask.
Customer Information for Major U.S. Banks
We’ve collected the links you need for the top five retail banks in the U.S. You can find out the terms of your account, see which sections apply to account freezes or closures, and contact Customer Service.
Banks offer different types of accounts in different states, so you may need to enter your ZIP Code to download your bank’s Customer Agreement. The agreements we’ve linked to below state that they apply to most checking and savings accounts in the U.S.