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Transferring Property Prior to Filing Bankruptcy: A Common Mistake with Disastrous Consequences

Dec. 2, 2021

Many individuals, when contemplating filing for bankruptcy, worry about protecting assets from creditors. The stress and worry often cause people to take actions that later adversely affect their bankruptcy case. One common mistake is the transfer of property prior to filing bankruptcy. Individuals will often transfer the title of a vehicle or real property to a friend or family member under the mistaken assumption that doing so will shield the asset from their creditors. This assumption is completely wrong.

Transfers of property, both real and personal, that occurred within the two years prior filing a bankruptcy must be disclosed on the petition and are looked at closely. Section 548 of the bankruptcy code give the bankruptcy court the power to avoid or “claw back” transfers of property that are made with the “intent to hinder, delay, or defraud” creditors or transfers wherein the debtor is insolvent and receives less than reasonably equivalent value (think fair market value) in exchange for the property.

The “intent to hinder, delay, or defraud” creditors is pretty obvious: The debtor intentionally transfers assets as part of an asset protection scheme to shield them from creditors. For example, the transfer of property (real or personal) to a family member, friend, or business entity prior to the filing of a bankruptcy with the understanding that the property will be transferred bank to the debtor after the bankruptcy. In these circumstances, the debtor intentionally conceals the transfer and fails to disclose the transfer on his/her bankruptcy petition. This is actual fraud and carries severe consequences. The consequences can be the loss of the bankruptcy discharge all the way up to a $250,000 and 5 years in federal prison.

A transfer for less then reasonably equivalent value, while not as shocking, is still an action that must be avoided. For example, a parent selling a vehicle to their adult child before filing for bankruptcy for well under the market value. The thinking is often that “I am going to lose it anyway so why not give it to someone who needs it.” Here, the debtor is essentially thinking that they are being charitable. However, transfers where the debtor is essentially giving property away can be avoided by a bankruptcy trustee. Such transfers often drag family members and friends into the debtor’s bankruptcy proceeding because they must either turn the asset over to the bankruptcy trustee (if they still have it) or the monetary value of the property.

When filing for bankruptcy complete and open disclosure is a must. Be sure to be completely honest with your attorney and disclose all required information on your bankruptcy petition and schedules. If you have already transferred property (real or personal), be sure to speak with an attorney to consider your options. There are ways to undo the transfer and avoid serious consequences, but full disclosure to your attorney and the bankruptcy court is of paramount importance.

If you have questions about filing a Chapter 7 or Chapter 13 Bankruptcy, give Treguboff Law, PLC a call for a free consultation.