Written by attorney John A. Steinberger

The Effect of Bankruptcy on Joint Accounts and Co-Signers

When a person declares bankruptcy, they may have joint bank accounts with a divorcing spouse, unmarried partner, friend or relative. They may also have co-signed for outstanding debts such as a personal loan or a mortgage.

This issue comes up often with married couples as well, as it's legally possible for one spouse to declare bankruptcy while the other spouse does not.

If you are considering filing for bankruptcy, you may be wondering whether all the money in your joint accounts could be seized by the court in a bankruptcy proceeding, including money deposited by the other co-signers on the account. You may also be wondering what happens to debts you are a co-signer to, such as a home loan.

You could be worried about whether your bankruptcy filing might leave your co-signers broke or ruin your relationship with relatives or friends. When it comes to joint accounts in bankruptcy, careful action can help preserve the funds -- and credit ratings -- of co-signers who aren't involved in the bankruptcy.

Let's look at joint accounts first:

Know that your joint accounts will be viewed as assets of the bankruptcy by the court -- but this does not necessarily mean all the money in those accounts can be seized by a bankruptcy trustee. If your co-signers can prove they deposited the money into the account or are the rightful owners of the funds, they should be able to keep their assets. Establishing a clear paper trail will be important here. The bankrupt party can help by providing any documentation that proves not all of the money is rightfully theirs.

Know that the bankruptcy court will investigate your claims about the rightful ownership of funds in joint accounts. The court could rule you have fraudulently transferred ownership of these joint assets to a co-signer in order to avoid having the funds included in the bankruptcy, or the court may affirm your claim that the money isn't yours and exclude it from your assets.

Now, let's look at co-signed debts such as loans:

Your obligations on co-signed debts such as a charge card can be confusing. When one of the signers files for bankruptcy, that does not necessarily relieve the other parties from their obligation to pay their share of the debt. A bankruptcy filing will stop the demand for payments on the debt while the bankruptcy proceeds. If the bankruptcy is successfully concluded or "discharged," the bankrupt person will no longer be obligated to pay on that debt -- but the other cosigners will still have that obligation.

The bankruptcy essentially cuts the bankrupt party out of the obligation to pay that loan. This can be a rude awakening for the other signers on the loan. The may stop receiving monthly bills for a while, but later -- once the bankruptcy process is complete -- they may suddenly get calls from a collections agency about the debt. It's important not to ignore these obligations, or other co-signers to the loans may ruin their credit ratings or slide into bankruptcy themselves.

As you can see, it's a tricky situation when one of the signers to a joint account or loan files for bankruptcy. To learn more, contact an experienced Bankruptcy attorney in your state.

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