Custodial Accounts in Bankruptcy

Feb 15

Custodial Accounts in Bankruptcy

This personal bankruptcy question was posted on the internet in January of 2011 as comments in a bankruptcy discussion: “Our children have a savings account, I am the custodian on the account. Is the account safe in bankruptcy? We try to contribute when we can, but most the money is from when they did modeling jobs, gifts etc.”

One of the gray areas that seems to be in bankruptcy law is between a parents bankruptcy and custodial accounts held for minors. From what I have researched, it appears that Trustees can take a close look at the accounts and possibly seize them under certain circumstances. A similar but more serious problem arises with judgments from creditors. If the account is listed in the name of the parent in a judgment, the account can be frozen and has actually been seized in times past. Recovering the account is a mess usually left to lawyers and courts to untangle, all costly ventures. The bank will normally do as the court dictates.

One question keeps popping up in all the illustrations about bankruptcy and judgments, is the account clean? Determining whether the account is clean means determining where the money came from in seeding the account, what the money has been used for in the account, and whether the custodial parent has benefited financially from the account. In the case of bankruptcy, the problem is not so complicated because you have only two people to contend with determining whether the money is open to seizure- the bankruptcy Trustee and Judge. The Trustee whom makes the initial determination as to seizure of custodial accounts can be challenged before the bankruptcy Judge. The Judge is the only one who can overturn the Trustees decision.

Most agree there are two factors in determining whether a Trustee might go after a Custodial Account. The first factor is how much money is in the accounts, and the second factor is the mood of the Trustee at the time of examination. Proof of the purity of the Custodial Account will rest with you if the Trustee seizes the account. Regardless, this is a complicated area of the law and will most likely require you to consult with a bankruptcy attorney in order to determine how the law will affect your childs account. Wisdom might dictate you consult with an attorney anyway.

Some say an once of prevention is worth a pound of cure. It is probably advisable that when you set up a Custodial Account, you have a professional help you set it up to avoid future problems like the ones we have been discussing, but there may be a some things you can do if you have already established the account before a judgment is rendered and bankruptcy declared. It is possible you can move the money to other custodial accounts in others names, such as a grandparent or spouse, as long as they are not subject to judgment or bankruptcy proceedings, and as long as you can prove the purity of the account purposes. In other words, if you can prove the account has been used strictly for the minor and not jointly with the bankrupts personal activities, then there is probably no reason to fear being accused of fraudulent activity prior to filing bankruptcy.

As you should be able to see from this discussion, problems with Custodial Accounts in bankruptcy have complicated resolutions better left to professionals who are experienced and trained in the filed. Bankruptcy laws can be complicated, and common sense indicates you will probably need a bankruptcy lawyer in order to properly understand how these complex laws may apply in your situation. If you determine you are in need of relief from the stress associated with debt and you live in or around the metropolitan areas of Buffalo or Niagara Falls, New York, contact us today. We will help you find a bankruptcy attorney in your area that will help you with any questions you may have on bankruptcy law.

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