Too often, your client is a signatory on an account containing someone else’s money.
The parties think a joint account is a convenience; often it’s a hedge so that the client can care for a parent or other dependent person should the other become incapacitated.
It becomes a lot less convenient when your client hits financial difficulties. The account becomes vulnerable to levy by judgment creditors, offset by the depository institution, and perhaps turnover by a bankruptcy trustee.
The problem is compounded when your client forgets to mention it because, in her mind, it’s not her money.
What do you do when “others” don’t share that view?
Without statutory help
If you are lucky, the other party’s Social Security number was used when the bank account was opened. That strengthens the argument that the money isn’t really the debtor’s money.
If you aren’t so lucky, prudence may suggest you want to drain or close the joint account. If the account is worthless at filing, the other party isn’t exposed to having the money seized by the trustee while you argue the law and equity of the situation.
Yet I am reluctant to have my client, the prospective debtor, close the account or write the check for “balance of the account”. First it looks bad, and reinforces the idea that the money was the debtor’s to spend. Second, it clearly has to be disclosed under transfers and closed accounts on the SOFA.
When possible, I propose that the party whose money it is make the withdrawal and deposit the funds elsewhere. I believe disclosure is still necessary, but the threat of immediate turnover to the trustee is overcome.
An alternative is to list the account as “property held for another” on the statement of financial affairs.
But there may be help elsewhere.
The statutory fix
State law determines what it is that the debtor owns. And the law of California, where I practice, has this statutory gem:
An account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each, unless there is clear and convincing evidence of a different intent. Cal. Probate C. 5301
Until another lawyer pointed me to this provision, I would never have thought to look in the Probate Code for help arguing that my client was not really the owner of a bank account on which she could draw down the entire account.
But there it is. Clear law that says that ownership is in proportion to the contribution of each person named on the account. So if it’s Mom’s money, your client’s name on the account doesn’t make it the client’s property.
California can’t be the only state to have addressed this issue in its legal code.
Your mission: hunt down comparable law where you practice to protect joint accounts in bankruptcy.
Image courtesy of Flickr and MontyAustin