What Is a Frozen Account?

A frozen account is a bank or investment account through which no transaction can be made. Account freezes are normally the result of a court order and, in some cases, they may be done by the bank itself. This usually occurs when the account holder has unpaid debts to creditors or the government, or when there is suspicious activity detected through the account.

Key Takeaways

  • A frozen account is a bank or investment account through which no debit transaction can be made. 
  • Account freezes are normally the result of a court order and, in some cases, they may be done by the bank itself. 
  • When a bank account is frozen, it may be because of money owed to another individual or business. 
  • Account freezes are not permanent, and generally require certain actions from the account holder before they can be lifted. 

Understanding Frozen Accounts

Frozen accounts do not permit any debit transactions. When an account is frozen, account holders cannot make any withdrawals, purchases, or transfers, but they may be able to continue to make deposits and transfer into it. Put simply, a consumer can put money into an account, but cannot take money out of it. There is no set amount of time that an account may be frozen. Freezes are usually lifted once the account holder satisfies the conditions of the freeze.

When a bank account is frozen, it may be because of money owed to another individual or business. Account freezes may also be the result of outstanding debt to the Internal Revenue Service (IRS). Any creditor that has a judgment against an individual can also have their bank account frozen. The creditor can actually freeze the account for up to twice the amount that is owed.

In order to process an account freeze, banks and investment firms must first receive a court order. When a bank receives the judgment, it is legally bound to place the freeze on the account immediately and is not required to inform the account holder. The institution may also be able to temporarily freeze the account in certain instances without a judgment.

Financial institutions must freeze accounts immediately after they receive a court order and are not required to inform account holders.

When, and if, the institution sends a notice to the account holder, the consumer can look for the lawyer and phone number listed on the notice. If they did not receive a notice after the account was frozen, they can call the bank and ask for the lawyer's name and phone number so they can attempt to settle the account.

Reasons Accounts May Be Frozen

Accounts may be frozen for a number of reasons. Regulators or a court may freeze accounts if the account holder fails to disburse payments that are due or other violations. In addition to bank accounts, brokerage accounts can also be frozen by the Federal Reserve Board under the stipulations of Regulation T concerning cash accounts and the purchase of securities. A 90-day freeze is done to prevent free-riding, a prohibited act where an investor attempts to buy and sell securities without fully paying for them. During such a freeze, the investor may continue to purchase securities; however, they must pay for the trades in full on the date they are made.

Banks may also freeze accounts if they believe the account activity is specious or not in compliance. This may stem from actions the bank suspects were fraudulent and perhaps not taken by the account holder. For instance, a sudden and suspicious exorbitant withdrawal or transfer to an overseas account may indicate an account has been compromised. Accounts may also be frozen if the owner passes away and an heir or administrator to the decedent’s estate has yet to be named.

If an individual is found to be complicit in certain crimes, their accounts may be frozen, potentially including those held jointly with spouses and business partners. An account may also be frozen by a bank or a court of law if the owner is suspected of illegal activity. Account holders may request that the bank or institution freeze their accounts.

How to Unfreeze an Account

Account freezes are not permanent and generally require certain actions from the account holder before they can be lifted. The account freeze is lifted if, and when, payment is made in full to clear an outstanding debt to a creditor or the government. In some cases, the creditor may be able to settle the debt for a lower amount.

In cases of suspicious activity, the bank generally lifts a freeze order after an investigation is complete. If illegal activity is detected, or if the account holder is found to be complicit in any fraud through the account, the account may be permanently closed, and any remaining funds may be seized.