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How are joint accounts handled in bankruptcy?

Debtors need to use caution regarding joint accounts

Jointly held accounts present a special challenge to people who are filing bankruptcy. Any misstep before and during the case may leave the co-owner of a shared bank account answering to creditors as much as the party who is seeking relief in U.S. Bankruptcy Court.

In some states, any jointly owned account is considered to be the property of those whose names are listed on it. At least half the money is viewed as the property of the person filing bankruptcy, which makes it available to repay creditors.

But debtors have the right to "rebut" their ownership of the money if they can prove the other person on the account deposited most of the funds. However, that also leaves the co-owner not involved in the bankruptcy open to collection efforts by creditors.

The same rules apply before bankruptcy is filed. If creditors sue and get a court judgment against a debtor, they may be able to seize any bank account that has the debtor's name on it, including a joint account. The reasoning is that the money in the account is legally the property of all those listed as owners.

After a bankruptcy petition is filed, creditors are prevented by the court's automatic stay that halts all collection efforts and lawsuits against a debtor. That lasts for the duration of a case, which is typically a few months for a Chapter 7 liquidation case. Chapter 13 filers have the same protection for three to five years while they pay creditors through a court-ordered plan.

No transfers allowed

In spite of the risks to shared accounts, those involved in bankruptcy cases shouldn't be tempted to take matters into their own hands. Transferring money solely into the other party's name to prevent it from being counted as part of the bankruptcy estate amounts to fraud. The penalties can be severe, ranging from a court refusal to discharge the debts to heavy fines and possible jail time.

If the court learns that such action has been taken by a debtor, the move may appear suspicious and the funds could be viewed as available to pay creditors.

The best approach is to provide as much documentation as possible regarding the shared accounts. Bank statements will show who has made deposits and withdrawals on a regular basis so the court can decide who has the greater stake in the account balance.

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