How Does Bankruptcy Affect Joint Accounts?

When considering bankruptcy, many concerns can plague your mind, but one primary concern that often arises is how your bankruptcy might impact a jointly held bank account. If you share an account with a spouse, business partner, or family member, the effects of bankruptcy can have legal and financial implications on both account holders. You may be hesitant to go through with bankruptcy out of fear of what will happen to them.

At Whitten & Whitten, we have spent decades helping people get out of debt, and we don’t want to see you not reap the benefits of bankruptcy due to fears over a shared account. In this post, we will explore how joint accounts are affected by Chapter 7 and Chapter 13 bankruptcies and ways to mitigate risk for all account holders involved.

How Does Bankruptcy Affect Joint Accounts?

The treatment of joint accounts during bankruptcy largely depends on two factors: the chapter of bankruptcy being filed (Chapter 7 or Chapter 13) and state property laws.

Joint Accounts in Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves selling nonexempt assets to repay creditors. Joint accounts are often considered part of the bankruptcy estate, and a trustee may target the funds for repayment of debts.

• Ownership Matters: The trustee first determines the portion of the joint account balance that belongs to the individual filing for bankruptcy. Documentation showing contributions to the account may be required to prove ownership.
• Exemptions: If the individual’s portion of the funds can be exempted under state laws, the joint account may be protected from seizure. However, if the funds exceed exemption limits, the trustee can seize the “nonexempt” portion to satisfy debts.
• State Laws: Some states assume 50/50 ownership of joint accounts by default, while others consider contributions to decide ownership. Understanding your state’s property laws is critical in determining how much of a joint account can be protected.

Joint Accounts in Chapter 13 Bankruptcy

Chapter 13 bankruptcy focuses on restructuring debts through a repayment plan rather than liquidating assets. Joint accounts are treated differently than in Chapter 7.

• Debtor Keeps Assets: You are not required to surrender any portion of joint accounts in Chapter 13 bankruptcy as long as your repayment plan addresses the value of your nonexempt assets.
• Repayment Plan: The funds in the joint account may increase the amount you’re required to pay creditors through the structured repayment plan over three to five years.
• Temporary Protection: A “co-debtor stay” can temporarily prevent creditors from taking action against joint account holders, such as co-signers, during the duration of the Chapter 13 repayment.

Risks and Considerations for Joint Account Holders

Filing for bankruptcy doesn’t just affect the individual—it can ripple into the financial circumstances of joint account holders. If you hold an account with someone filing for bankruptcy, certain risks deserve your attention:

1. Liability Risks: Creditors may pursue you for debts associated with the joint account, even if you didn’t file for bankruptcy.
2. Frozen Accounts: Some banks freeze joint accounts as soon as a bankruptcy case is filed to prevent unauthorized withdrawals. This freeze can last until the court determines account ownership.
3. Credit Score Impacts: While bankruptcy impacts the filer’s credit, lenders and creditors may also assess the financial stability of co-account holders.
4. Loss of Funds: If a portion of the funds in a joint account is deemed nonexempt, it may be seized by the bankruptcy trustee, potentially leaving the co-owner without access to their contributions.

Remaining aware of these risks and consulting with a bankruptcy lawyer can help mitigate financial fallout.

How to Protect Joint Accounts in Bankruptcy

If you or your joint account co-owner are considering bankruptcy, there are proactive steps you can take to protect joint account funds.

1. Communicate With the Co-Owner

Open and honest communication is critical. Inform your co-owner about your bankruptcy plans and discuss possible steps to shield shared finances. Transparency will help reduce the risks and surprises they may face as a result of the bankruptcy process.

2. Document Ownership of Funds

Prepare documentation that proves how much of the joint account balance is attributable to each account holder’s contributions. This information will allow you to protect your co-owner’s share of the funds from being wrongfully included in the bankruptcy estate.

3. Utilize Bankruptcy Exemptions

Each state has unique bankruptcy exemption laws that protect certain assets, including bank account balances, from seizure. Work with a bankruptcy attorney to ensure you claim all applicable exemptions to safeguard the funds in your joint account.

4. Consider Separate Accounts

If possible, shift contributing funds to separate accounts before filing for bankruptcy. Ensure this process is done transparently with legal guidance to avoid allegations of fraudulent transfers.

5. Seek Legal Advice Early

Navigating joint accounts during bankruptcy can be legally complex. Getting professional advice from a bankruptcy attorney will ensure that both you and your co-owner’s finances are protected.

Move Forward with Confidence

Navigating bankruptcy is a challenging but manageable process, especially when sharing assets like joint accounts. With careful planning, clear communication, and professional legal advice, you can minimize risks and protect your financial future.

If you’re considering bankruptcy or have concerns about how it will affect your joint accounts, we at Whitten & Whitten are here to help. Our experienced bankruptcy attorneys can guide you through the legal process, ensuring your rights and assets are protected. Contact us today to get started.