Watch Out for Money Still in Your Checking Account on the Day Your Bankruptcy is Filed

Can your Chapter 7 trustee claim money that HAD BEEN in your checking account but then was paid on outstanding checks? Yes, in some states.

 

Assets in a Chapter 7 Case

Chapter 7 “straight bankruptcy” is very picky when it comes to timing about your assets. All your assets–everything you own—as of the moment your Chapter 7 case is filed comes under the jurisdiction of your case, which means it all potentially comes under the power of your Chapter 7 trustee.

However, in most Chapter 7 cases all of a debtor’s assets are protected from the trustee. Everything the debtor owns fits within the allowed property “exemptions.” So in those cases nothing belonging to the debtor can be taken by the trustee.

But in situations where some of a debtor’s assets do NOT fit with the exemptions, the job of the trustee is to take those non-exempt assets, sell (“liquidate”) them, and distribute the proceeds to the debtor’s creditors. That’s why Chapter 7 is sometimes called the liquidation bankruptcy, even though in the vast majority of consumer cases nothing is liquidated.

Money in Your Checking Account As an Asset

Money in your account at the time your Chapter 7 case is filed is clearly an asset that comes under the jurisdiction of your case. That means that your Chapter 7 trustee could potentially claim the money there, IF it was not exempt. Most of the time people filing bankruptcy don’t have much in their checking account when they file their case, and in any event whatever amount is in the account is usually covered by an exemption.

The Important Issue

But what if you had some money in your checking account, had written and sent out some checks that covered most of the money in the account, but you filed your Chapter 7 case before those checks had cleared? Since the money was in the account at the time your bankruptcy case was filed, would the trustee have a right to whatever portion of that money that was not protected by an exemption?

Or taking it one step further, could the trustee come after you for the money even after the checks had cleared (within a few days AFTER your case was filed) leaving little or no money in the account?

This is an important question because you could easily be in this situation if you write a check for your mortgage or some other larger expense shortly before filing bankruptcy.

And the Answer Is… ?

Whether a bankruptcy trustee could make you pay him or her (and thus your creditors) for money that WAS in your checking account on the day your Chapter 7 case was filed, even though that money shortly thereafter went to pay your outstanding checks, depends simply on what part of the country you live in. That’s because the federal Bankruptcy Code is not clear about the answer, and federal courts have answered this question both ways.

The Ninth Circuit Answer: Yes

In a recent case arising out of Nevada called Shapiro v. Henson, the federal Court of Appeals for the Ninth Circuit determined that the Chapter 7 trustee, Brian Shapiro, had the power to require the debtor, Barbara Henson, to pay him (and thus her creditors) more than $6,000, representing money in her checking account after subtracting the exempt portion. This court interpreted the Bankruptcy Code so as to require Henson to pay Shapiro the money because legally she had a right to the money at the moment her bankruptcy case was filed, regardless that she no longer had possession or control over the money two months later when Shapiro filed a motion in bankruptcy court to recover the money.

The Eighth Circuit Answer: No

A few years earlier a different federal Court of Appeals, this time for the Eighth Circuit, in a case arising out of Missouri called Brown v. Pyatt, determined that the Chapter 7 trustee, Tracy Brown, did NOT have the power to require the debtor, Gary Pyatt, to pay her (and thus his creditors) about $2,000, representing money in his checking account that had been paid out in checks pending when Pyatt’s bankruptcy had been filed. This court interpreted the Bankruptcy Code to NOT require Pyatt to pay the trustee the money. Its rationale was that because he no longer had possession or control over the money at the time that the trustee filed a motion to recover the money.

So Where Does That Leave Us?

The Ninth Circuit covers the states of California, Nevada, Arizona, Oregon, Washington, Idaho, Montana, Alaska and Hawaii. If your bankruptcy case is filed in any of these states, Shapiro v. Henson determines how your bankruptcy court would likely rule, giving the trustee the right to make you pay the amount of any pending checks (beyond any exempt portion).

The Eighth Circuit covers the states of Missouri, Iowa, Nebraska, Minnesota, North Dakota, South Dakota, and Arkansas. If your bankruptcy case is filed in any of these states, from what I can tell Brown v. Pyatt continues to determine how your bankruptcy court would likely rule, denying the trustee this right.

If you live in any other state, be sure to talk with your bankruptcy attorney about how the law is interpreted there.

The Lesson Here

This whole situation can be avoided—if you have the timing flexibility—by filing your Chapter 7 case at the time that you have no outstanding checks and a relatively low balance in your checking account.

But the bigger lesson is this. There are countless other little and not so little ambiguities in the Bankruptcy Code, some of which have been settled and some of which have not. So there is no substitute for having an experienced bankruptcy attorney in your corner to guide you through all of the potential issues.