Chapter 7 Bankruptcy Risks Money In Jointly Owned Parent/Child Bank Account

Parents often add their child’s name to the parent’s bank account so that the child will have access to the parent’s fund to pay the parents’ medical care and other support expenses as they grow older. This arrangement causes problems for a child filing Chapter 7 bankruptcy. The bankruptcy estate includes all assets titled in the name of the child. If a child is a joint owner of an asset half of the asset value presumably is part of the child’s bankruptcy estate. When a debtor is a joint owner with his parent of a bank account the presumption is that the child/debtor owns half of the money in the account. The debtor could rebut the presumption by proving at an evidentiary hearing that his parent contributed all the money to the account and that the parent did not intend to make a gift of half of the money to the child/debtor. Proving the ownership of the money is not only expensive, and a bankruptcy judge may not find reason to rebut the presumption that the debtor received title and ownership of half the account. It is better to clear up ownership prior to filing bankruptcy.

 Many debtors have suggested that they remove their name from the account or that they write a check to their parents for all the money. Either of these solutions technically is a fraudulent conveyance of assets prior to bankruptcy. The conveyance may be reversed, and even worse, the debtor’s bankruptcy discharge is at risk. The best solution is to transfer the money to the parents and postpone the child’s bankruptcy for up to two years. This is usually not practical for a debtor whose financial situation has already deteriorated to the point of contemplating bankruptcy. If bankruptcy cannot wait, then I usually recommend that the parent, not the child/debtor, remove all the money from the account and deposit the money in the parent’s separate account. If the money is actually the parent’s money this transaction may be better defended against fraudulent conveyance allegations. After all, the non-debtor parent is the party making the transfer and not the debtor. The debtor has not written any checks to transfer money and has not closed any bank accounts prior to filing bankruptcy.

The best solution is proper financial planning. A parent can add a child as an authorized signor to the parent’s check account without making the child a part owner. Or, the parent can make his bank account a “pay on death” account so that the money passes to the child without probate upon the parent’s death. A parent should never expose his own money to a child's creditors.

published by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida