Escrows Are Not Safe in Bankruptcy!

Your Escrow Might Not Be Safe in Bankruptcy!

Here's a tricky situation that keeps catching people off guard: What you think is a secure escrow account might not hold up in bankruptcy court. This is causing real problems, and recent cases show why we should all be concerned.

Take these real-world examples:

• A tenant's "escrow" for rent? The bankruptcy court said it wasn't really an escrow and let the tenant use the money.

• A hotel got $7 million from insurance for mold repairs, held "in escrow" by their lawyer. The court said nope - that's not an escrow either.

• Even a formal "deed escrow" holding $207,116 from a land sale didn't make the cut. The court made them hand it over to the bankruptcy estate.

Why does this keep happening? The main problem is that state escrow laws are fuzzy - they're based on old court decisions rather than clear modern rules. This uncertainty means bankruptcy judges often decide these arrangements aren't true escrows, and the money goes to the bankruptcy estate instead of its intended recipient.

But there's good news! The Uniform Law Commission has created a solution: the Uniform Special Deposits Act. It creates a clear path to set aside funds for specific purposes that will stand up in bankruptcy. Here's how it works:

• You set up a "special deposit" account that names at least two beneficiaries

• You specify exactly what the money is for and who gets it under what conditions

• You explicitly say the account is governed by this Act

The key benefit? If someone files bankruptcy, they can't just grab the money. They only get what they were entitled to receive under the original agreement.

This new law could help prevent those nasty surprises we've seen in recent cases. It's a simple fix to a problem that's been causing headaches for years.