Q&A: Is shared CD at risk if I file for bankruptcy?

It depends on how the certificate of deposit was set up

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also wrote for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Stewart Radio and other programs.

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Question Dear To Her Credit,
I am considering filing for bankruptcy. My father has a certificate of deposit in both our names in the amount of $18,000, which is not available to me until he dies. If I try to declare bankruptcy, will he be dragged into the whole mess because of my mess?  – Julia

Answer

Dear Julia,
If you file for Chapter 7 bankruptcy, all your assets may be used to satisfy the claims of your creditors, except as exempt by state law.

Whether the $18,000 certificate of deposit (CD) is considered to be your asset or not depends on how it is held, the state in which you live and other factors.

If you and your father are joint owners of the account, up to the entire account may be used to satisfy your creditors, depending on state law where you live. This is true regardless of any verbal agreement you have with your dad that you are not to use the money until he dies.

You might think that your dad could just take your name off the CD accounts shortly before you file for bankruptcy. That’s not a good idea. The bankruptcy court may see that as hiding assets, and the court takes a dim view of this.

One way you could save your assets in bankruptcy, including the CD accounts if they are held jointly, is to file for Chapter 13 bankruptcy instead of Chapter 7. In a Chapter 13 bankruptcy, the courts help you make a plan to pay off your debts within a certain period of time. You get relief from collection efforts, and a payment plan you can afford.

Situations like yours are one reason why I don’t advise parents to start adding adult children as joint holders on their bank accounts and other assets. It may seem like the easy way to transfer assets, and to make sure the adult child can manage the parent’s finances when necessary. However, if the child gets into financial trouble, the assets can be lost.

There are other ways to help a parent with his or her finances, such as having a financial power of attorney in place. (See an elder care attorney or other legal professional in your state if you need help determining the best strategy for your situation.)

If your father actually owns the account with the CD, and you are designated to receive them in the event of his death, that’s a completely different scenario. In that case, you really do not own or have access to the account – and neither do your creditors.

One thing you don’t need to worry about is dragging the rest of your dad’s finances into your “mess,” just because of the CD. Having one account together, even if it is a joint account, does not normally affect the rest of your and your dad’s individual finances.

If there is any way you can avoid filing for bankruptcy, regardless of how it would affect the CD, I highly recommend it.

Filing for bankruptcy is not cheap as you will pay legal and court costs. Filing for bankruptcy takes time, too, and you lose privacy and some control of your finances. If you file Chapter 7, you may lose some assets.

I have seen people file for bankruptcy as a sort of “throw up their hands” reaction, when other solutions would have been as effective.

On the other hand, if you owe more money than you can hope to pay back, generally because of one or more disasters in your life, bankruptcy may be the best option. This is often the case when someone owes more than one year’s salary in nonmortgage debt. The older you are, the slimmer the chances are that you can pay off huge amounts of debt.

If you have so many debts that you are thinking about bankruptcy, please visit a credit counselor first. I recommend finding a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America.

A good credit counselor can help you explore all your options, including debt consolidation, negotiation or bankruptcy for resolving your debts and getting your financial life back on track.

See related: 7 times when bankruptcy can make sense, Chapter 13 bankruptcy: How it works

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Updated: 11-18-2017