What happens when a check is outstanding at the time of a bankruptcy filing?

Woman Signing a CheckIf a debtor files a bankruptcy case after having written checks on a personal account, but before they are cashed who gets to keep the money?

This is a question that is being asked in the Henson case before the United States Court of Appeals in the Ninth Circuit, which has jurisdiction over the nation’s midsection. Although the answer won’t be binding on bankruptcy judges in either Massachusetts or New Hampshire, it’s still an interesting question to ponder.

The bankruptcy trustee in Henson has argued that the debtor should be responsible for paying the trustee the amount of the checks, which would still be in his account so long as they haven’t been cashed.

The debtor has argued that “turning over” these funds in this manner would leave him vulnerable to paying twice — if and when the checks are cashed.

It is the debtor’s position that instead of demanding the funds from him, the bankruptcy trustee should be limited to trying to recover the money from the payee of the checks, funds that then could be distributed to make partial payments to the creditors in the case.

Although it will be interesting to see how this case comes out, in the meantime, it points out another aspect of pre-bankruptcy planning that lawyers should pay attention to: uncashed checks. Unless there is some compelling reason to do so, debtors are best advised not to be writing large checks right before their case is filed. Small checks for incidentals are probably OK.

 

By Doug Beaton

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