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What Happens to a Joint Bank Account in Bankruptcy?

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One of the trickier situations in New York bankruptcy is when a debtor co-owns an account with another person. It’s also a common situation: Debtors frequently own things with spouses, children, and even elderly relatives. It’s not so much of an issue when married couples file bankruptcy together—the account is indisputably an asset to the bankruptcy estate—but when the co-owners don’t or can’t, then problems can arise for debtors. So how does New York resolve this?

The short answer is that the money in the account is split 50-50.

The long answer is that the account is considered a “joint tenancy.” This legal term simply means that both (or all, but let’s just keep this to two people) parties have equal title to the account. In other words, they have equal rights to the account’s assets. One person can spend everything in it on whatever he or she wants without the other’s foreknowledge. The agreement to hold the money in a joint account permits these kinds of decisions in advance of either of the co-owners making them. The relevant law here is not the Bankruptcy Code but New York Banking Law, section 675.

Importantly, other states’ banking laws work differently. In some states the ownership of the account’s assets is apportioned based on the relative amounts each co-owner deposits into the account.

In bankruptcy, the trustee relies on state law and treats a debtor’s co-owned account as an asset to which the bankruptcy estate is entitled half of the balance. Sometimes things turn out okay because the debtor has sufficient exemptions to protect the account. For debtors claiming a homestead exemption, this might not amount to much, just a $1,100 wild card exemption in New York or $1,250 under the federal exemptions. Debtors who don’t need a homestead exemption can use the lesser of $5,525 or $11,025 minus their personal-property exemptions, but the federal exemption is $11,850.

The potential problems joint accounts pose in bankruptcy are best avoided before bankruptcy. For one, spouses should have their own separate accounts, especially for their incomes. This wasn’t as much of a problem before the time of direct deposits, but it is now. Debtors who are holding money inter-generationally, whether for children or elderly relatives are better off creating trust accounts that name the children or relatives as beneficiaries. This way trustees cannot access the accounts, unless they think a fraudulent conveyance has occurred. Finally, for elderly relatives, debtors should consider executing with them durable powers of attorney that give them rights to act in their relatives’ interests if they are ill or incapacitated.

If you are experiencing financial difficulties, then talking to an experienced New York bankruptcy lawyer is crucial to ensuring that your co-owner’s assets are protected.

For answers to more questions about assets in bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

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