The Floating Check Conundrum In A Chicago Bankruptcy
Once a debtor files bankruptcy, the trustee legally owns all the debtor’s nonexempt property, including money in a checking account. What happens if you write a check and then declare bankruptcy before it clears? Will the bank honor the check, since the funds in the account are technically no longer yours?
This issue used to come up very frequently when nearly everyone wrote paper checks and put them in the U.S. mail. Spending habits have changed a lot in recent years. Moreover, Indiana and Illinois both have generous wildcard exemptions. So, in many cases a checking account may be exempt property.
But the issue still arises rather frequently. Typically, the debtor has set up ACH or other automatic debits for monthly bills. If the checking account was not exempt, the trustee person who oversees the bankruptcy’s day-to-day legal proceedings) could later file a motion for turnover. Trustees usually receive a bounty on any nonexempt funds they collect, so there may be a financial incentive. Thus, the questions posed above still remain, and courts still struggle with this issue.
Why the Issue Matters in Illinois
In many cases, a single monthly installment payment could be $2,000 or even more. That’s a substantial amount of money, especially when money is tight. A motion for turnover is essentially a demand that the debtor “turn over” the missing funds and reimburse the bankruptcy estate. The trustee then distributes the finds among the creditors.
That demand could significantly impact the debtor’s promised fresh start. An unexpected payment delinquency, another black mark with the bank, and high NSF fees are clearly not what the Bankruptcy Code intended for Chapter 7 and Chapter 13 debtors.
These same considerations apply to ACH debits. Additionally, in many cases, the debtor may be unable to cancel a pre scheduled debit before the bank segregates the funds from the rest of the account.
A brief side note about ACH debits and bankruptcy. The automatic stay forbids all contact between moneylender and bankruptcy debtor. In an abundance of caution, many creditors cancel ACH debits, which could be construed as communications. So, watch your bank account carefully. Some creditors give notice that they will not debit the account, and some do not. If the moneylender does not tap into your account, the bill is still due. You’ll need to make other arrangements straightaway.
Handling the “Floating Check Controversy” in Indiana
Even though it runs contrary to the spirit of the Bankruptcy Code, Chicago trustees routinely file motions for turnover in these instances. The age-old mootness doctrine may be the best defense in these matters.
Assume that Frank and Terry each claim to own a house. The dispute goes to court. Before the judge can rule, the barn burns down. Now, it does not matter who owned the house, because the house is gone. In most cases, Illinois judges can only resolve actual controversies. They cannot weigh in on theoretical disputes.
Arguably, the same thing applies to the floating check question. Maybe the trustee owned the money and maybe s/he didn’t. But it does not matter now, because the money is most likely gone.
Generally, a bankruptcy attorney uses arguments like this one to obtain a favorable out-of-court settlement. That result avoids the expense and uncertainty of litigation.
Team Up with Experienced Attorneys
The floating check question is a lingering issue in consumer bankruptcy. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.
Resource:
leagle.com/decision/inbco20150403377
