Co-Signed Accounts Come Up Often in Bankruptcy

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Many times in the midst of a bankruptcy, people who are filing bankruptcy remember or discover a joint account of which they’re a part. However, the other party listed on the account is not filing for bankruptcy.

There are many different accounts in which this can occur and it’s completely innocent on part of the person filing. This complex issue is discussed in a YouTube video on the LaniganPL channel called Resulting Trust Bankruptcy – Co-signers on Accounts or Loans.

“Very often our client comes in and says that there’s an account that they’re on which they didn’t honestly recall,” said bankruptcy attorney Eric Lanigan.

“For example, a couple who was on the title to their son’s car, but who didn’t make any of the payments and had no involvement in the car. All payments made were made by the son. The only reason that they were on the title is because at the time the car was purchased the boy was a minor.” Lanigan said. “Therefore, the parents had to be listed on the title. But they don’t have any money in the car and they never used the car. But the car is included in the bankruptcy that they file.”

The other example is bank accounts,somebody might have a bank account and they list another family member, a father mother sister or brother jointly on the bank account so that if something happens to them there’s someone to step right in who has authority to write checks to pay bills as they become due. The question then becomes how is something like that how is that property treated in bankruptcy.

As a general rule, people feel that the asset is owned fifty-fifty. But that doesn’t always apply. There was a case in which there was a bank account, the husband passed away, all of the life insurance proceeds went into the bank account. At the bank’s suggestion, a family member was listed who lived in another state as a joint signer on the account. This way, if anything happened to the first person, the next person could step in and take care of the day to day needs.

A couple years later the co-signer’s completely forgotten about the bank account, files bankruptcy and doesn’t even list the account because it’s been forgotten. However, in the course of the bankrupty it comes to light. The trustee says well it’s a joint account so the trustee is after half the money.

And at the time of the bankruptcy filing there was a large amount of money in the account. What had happened was that the person not filing bankruptcy had deposited all of a life insurance proceeds into that account. 

A Resulting Trust in Bankruptcy

The trustee’s claim was defeated on the basis of what is called a resulting trust. It was established that the relative who filed bankrupty didn’t put any money into the account, never took any money out of the account, never even had possession of any checks to take money out of the account. Forgetting where the bank account was even located it didn’t even come up until after bankruptcy was filed.

And in Florida law, the courts have held that in that situation the bankruptcy filer holds what the law calls bare or legal title in trust for the account holder. This means they have no equitable interest in the assets, of the account. So all of the account belongs to the non-filer and the person filing bankruptcy had zero interest in the account. The non-filer was able to keep all of those funds.

What the Lanigans will generally do is recognize a situation like this before filing bankruptcy, they will suggest that one or the other person be removed from the account so that it doesn’t have to be dealt with while going through bankruptcy.

Again, this is another one of these areas where it might sound simple but the devil’s in the details and it can be very complicated if you have any situation like that seek professional advice.