I believe my job as a bankruptcy attorney is to help my clients take advantage of the primary purpose of the Bankruptcy Code: a new financial start. The best way I can do that is to make sure they keep as much property as the Code and the courts allow. To do that, I need to thoroughly analyze their complete financial picture. I need a complete inventory of their possessions and assets, and I need to know everyone they owe money to.
Helping my clients also requires careful planning to make sure that the timing of the filing of their petition doesn’t create any problems. One of those problems can be checks they have written that haven’t cleared. If you have written checks that haven’t cleared on the day you file, you may have to pay the amount of those checks to the trustee.
A recent 10th Circuit Court of Appeals Bankruptcy Appellate Panel decision highlights this issue. In In re Ruiz, the debtors wrote several checks prior to their petition being filed. On the day they filed, four of those checks had still not cleared and the funds to pay for those checks were still in their bank account. Four days after they filed, the bank honored the checks. The trustee argued that the funds in the bank on the day the debtors filed were part of the bankruptcy estate, and that the debtors needed to pay him the amount of the uncleared checks. The debtors, of course, disagreed and argued that the checking account was simply a debt owed to them by the bank, and that it was the right to collect on this debt, rather than the fund themselves, that were part of the bankruptcy estate.
Unfortunately for the debtors, the Panel agreed with the trustee and held that a.) the funds in the checking account were property of the estate; and b.) the debtors had control over the funds in the checking account and were required to turn over the funds for the uncleared checks. The Panel acknowledged that the debtors were going to take a “double hit” by paying twice, once to the recipients of the checks and then to the trustee. However, the Panel felt that they had to balance the Code’s policy of providing a fresh financial start with the equity of providing a fair and equitable distribution of the debtors’ assets to their creditors.
Before I file a client’s petition, I make sure that all their checks have cleared and let my clients know what could happen if they haven’t. I cringe at the thought of telling my clients that they’re going to have to pay the trustee over $3,000 for something that could have been easily avoided. Your job isn’t over once you hire a bankruptcy attorney. You can’t simply throw documents at him and expect everything to turn out. You need to stay full engaged in the process. Review your petition carefully and don’t be afraid to ask questions.
You can read the decision here.