The “Check is in the Mail” Bankruptcy Case

23 May The “Check is in the Mail” Bankruptcy Case

When a person files bankruptcy, all their property goes into the bankruptcy case and becomes part of the “bankruptcy estate.” This includes bank accounts. Often, checks have not cleared yet when the case is actually filed. But they clear immediately afterwards. The Chapter 7 trustee — who is charged with collecting the estate property and liquidating for creditors — now has a dilemma: On the day the case was filed, there was money which is now gone, where do I go to get the money back?

In 2007, the Eighth Circuit Court of Appeals, the highest court to address the issue under the current bankruptcy law, said, “Not from the debtor.” The court concluded the trustee is not entitled to compel the debtor to “turnover” property
which he does not have and did not wrongfully dispose of.

The circuit court said the trustee should be limited to getting the money back from those who received it, or should take control of the bank account immediately upon the filing of the case to prevent checks written pre-filing from clearing. But they should not normally be able to force the debtor to make it up.

This is an important issue for some consumers. Most of the time, people going into bankruptcy don’t have a lot of money so they are only paying bills they really need to pay (e.g. rent, utilities, car or house loans). So they may still want those payments to be left alone — and will readily agree to repay the money to the trustee anyway. If they can. But sometimes they can’t. In those situations, the trustee may disrupt the debtor’s life by recovering the payments (so the debtor is behind suddenly on rent or utilities) — but at least the debtor has a chance of completing the case and receiving a discharge unmolested.

And the case is important for other things as well. It is a reminder that folks filing bankruptcy need to provide accurate information — the balance in an account on the paperwork should be the actual balance in the account today, not “after those checks clear.” In my office, we ask clients to bring a print-out or ATM receipt from the bank when they come to sign paperwork so we know to the penny what is there.

It is important because it reminds folks when a case is filed, a trustee can take over a bank account and freeze it, particularly if the trustee cannot determine for certain if there is enough there to justify taking it to pay creditors.

It is important for what it does not say, as well. The debtor remains responsible for any checks written after the case is filed, if the amount was not protected (“exempt”) from the creditors. The trustee is entitled to those funds and the debtor would have to make up that money, if spent.

These are tough results for trustees. Most trustees are good, decent people who do not want to create additional hardships for someone in bankruptcy. Practically, it is difficult to “take control” of the estate on the date of filing when checks can clear in seconds. Even with electronic filing of cases, the trustee needs to find enough information about the account and someone at the bank to listen to them. At the same time, the trustee does not want to interfere with money the debtor might earn and deposit to the account after the case is filed — and could potentially be held liable if he does so. A trustee also knows recovering the payments from a landlord will quite often create problems for the debtor who now may be evicted for non-payment.

Finally, the trustee may not be able to quickly determine how much, if any, of the bank balance the debtor could exempt from the estate so he may not be able to know whether all this is worth it. But, at the same time, he is liable to the creditors to collect their money quickly and efficiently. After all this work and possible scrambling, the trustee could potentially end up with only $60 payment for his services.

Always remember: Writing the check doesn’t complete the transaction — it’s complete only after the check is cashed. The “check is in the mail” isn’t enough.

Case: Tracy Brown v. Gary Wayne Pyatt #06-3404 (8th Cir. May 23, 2007)

Photo Credit: flickr/kla4067

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:

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