The Eighth Circuit Court of Appeals just issued a decision today which fixes one of the numerous rules of bankruptcy law that had been wrong for a long time. They actually did something that makes sense.
The rule was that any money in a debtor’s checking account was considered to be an asset of the debtor even if there were outstanding checks that had not yet cleared the bank. In the case of Brown v. Pyatt, U.S. Court of Appeals Case No: 06-3404 from the U.S. Bankruptcy Court for the Eastern District of Missouri – St. Louis, the federal appeals court told the United States Trustee’s office that they can no longer count money in a checking account as an asset if there are outstanding checks that the money is needed to cover.
I consider this a victory for compassion and clear thinking. Up until now, a debtor in bankruptcy, after being lectured by a credit counselor about the need to learn better financial habits, was then told by the trustee that already spent money in a checking account still counted as an asset. It was a stupid rule, and I’m glad to see it apparently gone.
I hope this doesn’t turn out to be an empty victory. The fine print in the decision indicates that the trustee can go after the payees of the checks and recover the money from them. I’m not sure if the trustees will actually go ahead and do that. But lets say one of the checks is for a house payment and the trustee demands repayment from the mortgage company. I would assume that the mortgage company would then claim that the mortgage is a month behind – which puts the debtor back in a tight spot. Even though I like the looks of this decision, I will continue for now to advise clients to avoid having checks out there that have not cleared as of the date of filing. What I’ve been doing is telling them to use money orders instead of writing checks in the week or so prior to filing.
For a rundown on filing bankruptcy in Minnesota, see my site at http://www.mn-bankruptcy.com.