Joint Bank Account Pose a Potential Problem in Chapter 7 Bankruptcy Cases

As a general rule, unexempt property is sold by the bankruptcy trustee and the proceeds after sale costs are distributed among the debtor’s creditors.  Nice and convenient are liquid funds, such as bank accounts.  These are in a perfect state, ready to be distributed to creditors with little work by the Trustee.  Trustee’s love unexempt bank accounts.

The Washington State exemption statutes exempt only $500 for all bank accounts.  That means all bank accounts, combined, must be shoehorned within that ceiling of only $500.  With the crazy real estate values in western Washington, more and more debtors are having to opt for the state exemptions instead of the federal exemptions to protect their home.  That $500 ceiling on bank accounts can be a real issue.

A major problem are joint bank accounts.  The problem here is that debtors frequently forget to list them on the bankruptcy schedules.  Upon cross-examination by the bankruptcy Trustee at the 341 hearing, debtor’s suddenly remember that they are on their parents bank account or that they have a joint account with their minor children.  This joint ownership was usually set up a a matter of convenience.  Particularly in the case of an elderly parent, should something happen to a parent, their children who are on the joint account can easily withdraw funds to aid the parent.

The problem here is that if the debtor can withdraw the funds, then arguably so can the Trustee for the benefit of creditors.  If there are insufficient exemptions to protect the joint account, the funds in the joint bank account can be lost to creditors in the Chapter 7 bankruptcy.

One argument for the debtor is to claim that the funds were all sourced by the parent and, therefore, are not the debtor’s funds.  Therefore, the funds are not part of the debtor’s bankruptcy estate.  This may require extensive factual evidence showing that all the deposits and withdrawals funds came from and to the parent, and not the debtor.  But regardless of the source of the funds, if the debtor has an unfettered right to withdraw, then the source-of-the-funds argument may not be a winning argument.  The debtor would have to prove that he or she has restriction on the debtor’s right to withdraw, that the withdrawal rights were limited to situations benefiting the parent or child.  Proving that restriction, which probably was never put in writing, is going to be difficult if not impossible, especially if the only evidence is self-serving testimony of the debtor and the debtor’s family members.  That kind of testimony is just too convenient to be compelling to a judge.

For this reason, it is extremely important that the debtor disclose the existence of all joint account to the debtor’s attorney prior to filing the case.  If the exemptions are sufficient to protect the funds, fine.  If not, removing the debtor from the account might be advisable.  For reasons relating to how bankruptcy cases are filed, closing the joint bank account might not be advisable.  Better to just remove the debtor from the bank account prior to filing the case.