Be Careful of What Funds Are in The Bank on The Day the Debtor Files Bankruptcy

In Maryland, the Chapter 7 Trustees are now asking to see exactly what funds were in the debtor’s bank account on the day he or she filed the Chapter 7 case. If the amount in the account is more than is listed on the debtor’s schedules and therefore not fully exempt, the trustee may ask the debtor to turn over the non-disclosed and non-exempt portion of the funds in the account. When indicating the amount in the bank account, a debtor may have deducted the amount in checks that he or she wrote prior to filing from the balance in the account. However, if those checks did not clear pre-petition, the money was still in the account on the date of filing and unless disclosed and exempted, may have to be turned over to the trustee. A debtor may be surprised to find out that they cannot deduct checks outstanding on the date of filing from the balance on the account, especially since by the time they meet with the trustee, the checks would have cleared and the funds are no longer in the account.

Section 541 of the Bankruptcy Code broadly defines property of the estate to include all legal or equitable interests of the debtor in property as of the date of the filing of the case. This will usually include all money in a debtor’s bank account. The Supreme Court has ruled in the case of Barnhill v. Johnson, 503 U.S. 393 (1992) the funds in a debtor’s bank account remain the debtor’s until the checks actually clear the bank, even though the debtor may have written checks that were outstanding as of the date the case was filed.

My suggestion is for the debtor to go online on the date the case is being filed and let the attorney know exactly how much is in the account on that date. Hopefully, it is not more than the debtor will be entitled to exempt. If it is, then the debtor may want to wait to file until all the checks that have been sent out clear the account, or withdraw the funds in the account and use the cash to pay bills that would be considered necessary expenses for the debtor or his or her dependents.

Laura J. Margulies is a principal in the firm of Laura Margulies & Associates, LLC. Our web site is located at: www.law-margulies.com. We represent consumers in bankruptcy and litigation matters in Maryland and the District of Columbia.