The Floating Check Controversy

At the moment you file a Chapter 7 Bankruptcy, all your nonexempt cash and non-cash property technically becomes part of the bankruptcy estate. An interesting question arises concerning the funds in checking and other Demand Deposit Accounts (DDAs).

Assume that you paid your $2,000 monthly mortgage payment on Monday with a check and filed bankruptcy the next day. The money would probably still be in your account, because your check hasn’t cleared yet. Or assume that the mortgage company automatically drafts your installment payment on the 5th, and you filed your petition on the 4th. Once again, the $2,000 is in your account but is not “your money” in any practical sense.

If the trustee files a motion for turnover demanding that you reimburse the estate $2,000, what happens then? This is known in some circles as the “floating check” controversy. With proper bankruptcy counsel and guidance, you can avoid being stuck in this unfortunate situation. If not, you can find yourself facing a motion for turnover from a bankruptcy trustee.

Response to a Motion for Turnover

The wording of Section 542(a) of the Bankruptcy Code is quite clear: any entity with possession of property belonging to the bankruptcy estate “shall deliver to the trustee, and account for, such property or the value of such property.” Yet the purpose of bankruptcy, according to Supreme Court Justice John Paul Stevens, is to give the “honest but unfortunate debtor” a fresh start in life. Debtors cannot get a fresh start if they are delinquent on their financial obligations.

Some bankruptcy attorneys argue mootness in these situations. Simply put, there must be a live controversy for the courts to decide. For the most part, judges do not issue advisory opinions or make decisions about hypothetical matters. There may have been $2,000 in the account that may have belonged to the bankruptcy estate, but the money is gone now so there is no basis for a motion for turnover. A finding for the debtor does not necessarily prevent the trustees from collecting. They may be able to file avoidance actions against the payees to recover the funds.

At the very least, these arguments give you leverage when negotiating with the trustee, who may be willing to accept a lesser amount, let you pay the money in installments, or both.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

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