Generally you should avoid selling or, worse, giving away property prior to filing for bankruptcy. Remember, bankruptcy functions as a kind of trade-off -you get to reduce or eliminate your debts in exchange for giving up property or income that you cannot shelter. Any action you take to artificially reduce your income or reduce your assets will be suspect.
The minute you file your Chapter 7 or Chapter 13 case, your “bankruptcy estate” comes into existence. This means that the trustee assigned to your case has an interest in everything you own. The Bankruptcy Code gives the trustee the power to look back at your financial dealings to determine if you intentionally made an effort to reduce the size of your estate.
What is a Fraudulent Transfer?
Giving away property prior to filing reduces the size and value of your bankruptcy estate and it reduces what creditors might otherwise get. The Bankruptcy Code imposes very harsh penalties on debtors who intentionally try to reduce the size of their bankruptcy estates. Section 548 of the Bankruptcy Code provides that a gift or a transfer of an asset for less than full market value within two years of your bankruptcy filing may be considered a “fraudulent transfer” and reversed by the trustee.
This means that the trustee can go to the person who received the property and demand that the property be returned to the estate.
In addition, Section 727(a) of the Bankruptcy Code provides that a transfer of property within one (1) year of filing that has the effect of diminishing the bankruptcy estate can disqualify you from receiving a discharge.
If you sold property for fair market value and can account for the sale proceeds, you should not have any problems. Similarly, if you transferred property under the terms of a divorce or other court order, you should be okay as well.
Should I be Concerned About Fraudulent Transfer Issues?
As you can see, the rules that govern fraudulent transfers and changes to your “bankruptcy estate” can be confusing. Our job as your lawyers is to help you understand the rules and comply with them. Here are two major points to take away from this article:
- if bankruptcy is even a remote option, avoid buying, selling, transferring or otherwise changing your financial affairs without first speaking to an experience bankruptcy lawyer
- if you think that you may have unintentionally violated a fraudulent transfer rules, do not try to fix the problem on your own – talk to a lawyer. Sometimes you can make the problem worse by trying to fix it yourself
- it is better to consult with a bankruptcy lawyer too early than at the last minute