Joint bank accounts can create traps and legal headaches when financial problems arise.

Commonly we have clients who have added their name to a bank account belonging to an elderly parent or an adult child.  Even more common are clients facing collection suits who have a joint account with a working spouse who is not facing financial problems. While these arrangements are entirely understandable in normal situations, when you are facing a lawsuit or other  financial problems arise they can and often do create serious headaches.

Bank Levies-“my money is frozen!”  Once creditors obtain a judgment against you, they will commonly try a “bank levy” to have a Sheriff seize the money in the joint account. If you are the defendenat and your name is on a joint account with someone else, this can result in the other account holder’s money being frozen without notice.

Fortunately, under New Jersey law (and the law in many other states) ownership of a joint account belongs to the person who put the money there, unless there is clear and convincing evidence of an intent by the other person to make a gift of the money deposited. That is the good news. The bad news is that faced with a levy on a joint account, the “non-debtor” whose money is in the joint account  will have to go to court to get the bank levy released. At best, this is an unwanted  expense (which can run into thousands of dollars in legal fees), and the frozen funds may not be released for weeks until a court rules.

Bankruptcy- whose money is it anyway? If a client files a personal bankruptcy, his ownership interest in the account becomes property of a bankruptcy estate which a bankruptcy trustee will look at as a potential asset. In the bankruptcy, the joint account must be listed as an asset, and it will be necessary to convince the bankruptcy Trustee that the money does not belong to the debtor in bankruptcy. With proper documentation and citation to the proper state and federal statutes, most– but not all–trustees will readlily agree. Meanwhile, there is uncertainty and the possibility of having to go to court, before the money is free for use.

With proper planning and guidance many of these problems can be avoided. We commonly recommend that if the purpose is for a child to be able to access funds to pay an elderly parent’s bills, the better course of action is to go to the bank and get signature authority or file a power of attorney that the bank will recognize. In every case, keeping good documentation about the source of funds is a very good idea.

Otherwise, in the spousal joint account, it is better in these situations for the non-debtor spouse to set up a separate individual account and keep her funds separate. Again, this requires good documentation. Merely transferring the debtor’s money into a spouse’s account will create other problems.

Note that these concerns will usually not apply to a bona-fide “Minor’s Account” where the parent is named on the account merely as a custodian for a minor child, AND where the account contains the child’s own money from normal gifts or the child’s own earnings. But again, transferring your money into a child’s account to hide it or protect it from creditors is unwise and can create “fraudulent transfer” claims.

Anyone with these types of concerns needs to get qualified legal advice to avoid the several pitfalls. As with many other situations, there is a right way and a wrong way to handle these situations, to avoid needless unpleasant surpises and legal expense.

Call us- we can help. If you are a New Jersey or southeastern Pennsylvania resident, we can help. Call us at 856-596-2828 for a free initial consultation. For information about us or about other issues, please feel free to browse our website or our blog.

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