Joint Bank Accounts in Bankruptcy – Alabama Bankruptcy Attorney Judson E. Crump

Here’s a question I recently received from a potential client considering Chapter 13 bankruptcy:

“My husband and I need to file Chapter 13 to save our business tools and other assets from credit card companies and their debt collectors.  We don’t have much cash on hand or in the bank, but my elderly mother has a substantial savings account with my name on it.  The money in there belongs to her and is used solely for her care and needs: my name is jointly on the account just to allow me to help handle her affairs.  Will the bankruptcy court take that money?”

This is a great question that not only illustrates the difference between Chapter 7 and Chapter 13, but also touches on a very important issue for lots of people in this situation.  If you’ve been an adult for long enough, chances are you have found yourself in the often difficult position of being responsible for the business affairs of an elderly relative.  One of the more common ways that people manage money for others is by adding their name to a joint bank account with the relative.  At first glance, this seems like a reasonable way to help manage a relative’s money, but if you’re facing financial troubles of your own, then it can be dangerous for both you and the owner of the money.  If you end up drowning in debt and need to declare bankruptcy, then you will have to face the question of how to handle the bank accounts that are attached to your name.

You may be tempted to think that since the money in the account is “not really yours” and didn’t come from your own income or property, then that it shouldn’t be available to your creditors.  But you’d be wrong.  If your name is on the account, then legally you have access to all the money in the account.  And so do your creditors.

This applies both to garnishments before you file bankruptcy and in a bankruptcy case itself.  Section 541 of the Bankruptcy Code defines “property of the estate” to include “all legal or equitable interests of the debtor in property as of the commencement of the case.”  Translation: if it has your name on it, it’s part of the bankruptcy estate.  This means that unless the money can be claimed as exempt under your state’s law, then it belongs to your bankruptcy case and is under the power of the bankruptcy trustee.

However, this doesn’t mean that the money just automatically disappears when you file a bankruptcy.  What happens to the money depends on what type of bankruptcy case you file.  If you file a Chapter 13, for instance, then the money will remain in your account, but you’ll just have to account for it in your Chapter 13 Plan.  In Chapter 7, however, the trustee is authorized to take and liquidate your assets, and if there’s a substantial amount of money in the account, he certainly will.  So if your name is on a joint account for a loved one, then one option is to simply file Chapter 13 and have your attorney account for the value of the money in your payment plan.

The general rule in Alabama is that ALL of the money in a joint account is garnishable by your creditors, unless you can affirmatively prove that the money really belongs to someone else. Amarlite Architectural v. Copeland Glass, 601 So. 2d 414 (Ala. 1992).  Under the Amarlite rule, it could be possible to prove that you didn’t really own the money in the account, but that could be a very difficult and risky undertaking.

“What if we just take my name off the account?”

Too late.  There’s another provision in the Bankruptcy Code that specifically forbids this.  Section 548 of the Bankruptcy Code requires you to disclose any transfers of property during the 2 years preceding your bankruptcy filing, and allows the trustee to recover any property transferred for the benefit of a relative during that time frame.  So if you were to take your name off the account, the trustee could simply un-do that transaction and take back the money.  If you have already taken your name off of a relative’s bank account, then you will need to wait 2 years before filing any sort of bankruptcy.

A better way to deal with this situation is to never put yourself in this position in the first place.  Rather than put your name on a relative’s account, you could create a trust account with you named only as a trustee and the relative as the beneficiary.  Any decent estate planning lawyer can help you with this.  There are huge risks involved in putting your name on someone else’s account, and you need to think about it before you do so.