What Is a Frozen Account? What Causes It and How to Unfreeze It

What Is a Frozen Account?

A frozen account is a bank or investment account that doesn't allow outgoing transactions. Account freezes are normally the result of a court order, though, in some cases, the financial institution itself may initiate them. Freezes typically occur when the account holder has unpaid debts to creditors or the government, or when suspicious activity has been detected in the account.

How an Account Freeze Works

Frozen accounts do not permit any debit transactions. When an account is frozen, account holders cannot make any withdrawals, purchases, or transfers. However, they may be able to continue to make deposits and transfer money into 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 that led to 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 court judgment against an individual can have that person's bank account frozen. In fact, the creditor can actually freeze the account for up to twice the amount that they're owed.

In order to process an account freeze, banks and investment firms must first receive a court order. At that point, the financial institution it is legally bound to place a freeze on the account. The institution may also be able to temporarily freeze the account in certain instances without a judgment.

When the institution sends a notice of the freeze to the account holder, that person should contact the lawyer and phone number listed on the notice. If they didn't 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 or have a hold placed on them for a number of reasons. Regulators or a court may freeze accounts if the account holder fails to disburse payments that are due or commits 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 freeriding, a prohibited act in which an investor attempts to buy and sell securities without fully paying for them in the meantime. 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 that certain account activity is suspicious or not in compliance with the law. This may stem from actions the bank suspects were fraudulent and possibly taken by someone other than the account holder, such as a scam artist. For instance, a sudden and unusually large withdrawal or transfer to an overseas bank may indicate that an account has been compromised. Accounts may also be frozen if the owner passes away and an executor or administrator has yet to be named for their estate.

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. Additionally, account holders can request that the bank or institution freeze their accounts. They might want to do that, for example, if they're concerned about someone making unauthorized withdrawals.

How to Unfreeze an Account

Account freezes are not permanent but generally require the account holder to take certain actions before they can be lifted. The freeze is typically lifted once the person has made payment 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 after both sides have negotiated.

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 involving the account, the account may be permanently closed, and any remaining funds may be seized.

The Bottom Line

Bank and investment accounts may be frozen for a variety of reasons. If you discover your account has been frozen, contact the financial institution or its legal representative as soon as possible to find out what you need to do to have the freeze lifted.