CHAPTER #22 Bankruptcy and Joint Accounts with Parents

Educational Savings Accounts are exempt from creditor attachment, as long as you have not put more than $5,000 per year, with certain other limitations.

I see quite a few clients whose names are on accounts that belong to their parents. They tell me that it is just for convenience, that the money belongs to the parent, and that the parent reports the interest on the parents return under the parent's social security number. The proper way to set up such a "convenience" account, where the child is only authorized to make withdrawals in case of emergency, is to make the child an authorized signer for withdrawals, not to put the account in joint tenancy with the child.

Similarly, many such joint accounts are intended to pass to the child on the death of the parent. It is just as easy to set up a payable on death account, instead of a joint account, but people do not seem to do it that way. A joint account transfers actual ownership. Each joint owner can withdraw the money without the consent of the other joint tenant.

In a bankruptcy, any money that is in joint tenancy accounts may be considered to be an asset of the bankruptcy estate. That is not a good result. I advise people to change the way the account is held, so that it correctly reflects the intention of the parent and child, without giving the child a present ownership interest. Of course, any changes must be disclosed on your bankruptcy petition, but, since you can prove that none of the money is yours, I have never had a problem with this.

The only reason most of these accounts are set up wrong is because bank employees are often lazy and stupid in these matters. They make no inquiry about what the depositor intends. They just want to get the money in their bank, and don't care how the account is set up. Therefore, if you are contemplating a bankruptcy, and have a joint account with a parent simply for convenience, or as an estate planning device in the event of the death of the parent, it is a good idea to change to account so that it is not a joint account, but simply an authorized signatory or payable on death account. This change on the ownership of the account has to be disclosed to the bankruptcy court and the creditors, but since it is not an actual transfer of assets, but a correction of the account title, it is not viewed as hiding assets from creditors, since the assets were the parent's to begin with.

On the other hand, as long as there was no gift-giving intent on the part of the parent, the funds are not viewed as belonging to the child in many cases, especially when it is easily provable that all the funds were the sole property of the parent before the account was set up, so many times in a bankruptcy case we disclose that there is such an account, but that the child is really holding the funds of the parent.

If a Bankruptcy Court should take the position that such an account actually belonged to the son or daughter, it might prevent discharge of debts without giving up that account to the bankruptcy trustee to distribute it to the creditors. Mom certainly would not like that. I have never had it happen, but it is one of those problem areas that we like to think about. Banks certainly give people a lot of bad advice in that area. We can file a Chapter 13 debt repayment plan to protect such accounts. I have had people come in to do that because they are on the mother's savings account, and a creditor is about to garnish it. The filing of a Chapter 13 will protect such joint accounts.

Problem: Cynthia needs to file a Chapter 7 bankruptcy, because she has $15,000 in credit card debt and can no longer meet the minimum payments. She is listed as a joint tenant on her parent's certificate of deposit in the amount of $10,000, because her father was using the joint tenancy as a device to pass the account to her in case of his death.

The Peter Francis Geraci Chapter 7 or 13 Solution: Since none of the money was intended to be hers, and the way the account was set up was incorrect, Cynthia files her Chapter 7 and discloses that she is holding her parents' certificate in her name as a joint tenant, but it is their property. Her bankruptcy attorney has Cynthia sign a disclaimer that, in the event someone wants to say that the deposit belongs to Cynthia and should be distributed to creditors, Cynthia may incur more attorney fees to defend it, or has the option of converting her Chapter 7 to a Chapter 13 and paying a sum equal to 1/3 of the deposit amount to the creditors. That, however, is very unlikely.