Floating Check Controversy: Whose Money Is It?

 Posted on March 23, 2015 in Chapter 7

According to the Bankruptcy Code, all a debtor’s nonexempt property belongs to the bankruptcy estate and the trustee has the power to collect such property and distribute the money to creditors. These seemingly straightforward provisions can have a significant impact on a debtor’s bank account. Just because there are funds in the account does not necessarily mean that the money belongs to the debtor.

Assume that David Debtor pays his mortgage with a debit card one morning, and files a voluntary Chapter 7 petition a few hours later. Technically, that payment is still in David’s account, because the bank may take several hours, or even several days, to process the transaction. But if David spends the money, he will be overdrawn. If the trustee later files a Section 542(a) motion demanding the money, what happens?

The floating check controversy also occurs in reverse. Bankruptcy debtors sometimes get tax or escrow refunds, win the lottery, receive an inheritance, or experience some other financial windfall. Again, if the trustee files a motion for turnover, what happens?

Dealing with a Motion for Turnover

If you are expecting a windfall, such as a tax refund, declare it as a contingent claim on Schedule B. An additional claim should not affect the outcome of the means test. If you receive an unexpected windfall, such as an inheritance, you can probably amend the schedules to reflect your new found financial gain without materially affecting the course of the bankruptcy. If you are using federal exemptions, these claims are typically not part of the bankruptcy estate, so you can probably keep the funds.

A simple floating check situation may be more complicated. Since the money is gone by the time the trustee files a 342(a) motion, mootness is sometimes a good defense.

Assume that David and Debbie both claim ownership of a house, and the case goes to court. But before the trial, the house burns down. Now, it does not matter who owned the house, so there is nothing for the judge to decide. In the same way, even though the hypothetical mortgage payment may have belonged to the bankruptcy estate, the money is no longer in the account, so the ownership question is moot.

At the Law Offices of Chance M. McGhee, you can have a free consultation with an experienced San Antonio bankruptcy lawyer. Call us today at (210) 342-8400.