Contract Provisions

Once in a while, a client of ours will bring in contract paperwork that they have with one of their creditors for me to review. The client is panicking because they discovered a “no bankruptcy” clause in the contract. The provision basically states that the client/debtor agrees not to file bankruptcy on the debt owed to the creditor. It’s not always clear whether the creditor, when drafting the contract language, is simply trying to deter the debtor from filing for bankruptcy, or if the creditor actually believes that the “no bankruptcy” clause can transform their debt into a non-dischargeable debt. Of course, certain debts are non-dischargeable by law, and you risk forfeiting collateral if you try to discharge secured debts.
However, rest assured that these “no bankruptcy” clauses are unenforceable. If you file bankruptcy and have one of these contracts, the creditor cannot sue you for breach of contract. Your discharge will not be denied.
This is a fundamental concept of contract law – that no matter what the willingness of the parties may be, you cannot agree to certain provisions that are illegal or against public policy. The government long ago decided to adopt bankruptcy laws to give those who need it a fresh start in their financial life. It would undermine the spirit of the law if creditors were able to have their debts discharged simply by putting this clause in.

Wells Fargo Slammed for Freezing Bankruptcy Debtors’ Bank Accounts

This has been an ongoing problem with Wells Fargo. When one of their banking customers files for bankruptcy, they slap a freeze on the customer’s savings accounts – they claim because they have a duty to preserve assets of the estate. Well, actually, they don’t. That responsibility falls to the debtor. When someone else does it, they are exercising control over the bankruptcy estate in violation of the automatic stay. The following is an excerpt from “Consumer Bankruptcy Abstracts and Research”:

Debtors scored a big win last week when the Ninth Circuit Bankruptcy Appellate Panel held that Wells Fargo’s national policy of placing an administrative freeze on debtors’ accounts when they file a bankruptcy petition violates the automatic stay by exercising control over property of the debtor’s bankruptcy estate in violation of Bankruptcy Code section 363(a)(3).

The BAP was quite emphatic is its opinion: “Wells Fargo asserts it did not exercise control over property of the estate. We disagree. Wells Fargo could have paid the account funds to the trustee; it did not. Wells Fargo could have released the account funds claimed exempt to the [debtors] when demand was made; it did not. Wells Fargo could have sought direction from the bankruptcy court, by way of a motion for relief from stay or otherwise, regarding the account funds; it did not. Instead, it chose to hold the funds until a demand was made for payment that it alone deemed appropriate. If that is not exercising control over the funds, we don’t know what is.”

In re Mwangi, Case No. 09-1408 (9th Cir. B.A.P., June 30, 2010)