The desire to protect your assets from creditors is natural. Bankruptcy law was developed to allow debtors to have certain protection of their property. But depending on the time frame, certain asset transfers are improper under U.S. Bankruptcy Code.
The underlying premise of bankruptcy is very generous - a debtor gets a fresh start free of most debt. But people, being what they are, found ways to game the system. Congress established asset transfer rules and made certain actions illegal, especially when done right before filing bankruptcy. Let’s take a look at a few:
1. Transferring property into someone else’s name. Debtors sometimes foolishly transfer assets into the name of a relative, business partner or friend to keep from losing the asset in bankruptcy. Such actions are often illegal, and in many cases unnecessary. If you transfer property into someone else’s name, especially in the year before your bankruptcy filing, the bankruptcy trustee may attempt to seize the property for the benefit of the creditors. The trustee can also opt to ask the court to deny a discharge of your debts.
You also take a huge risk when you transfer assets into someone else's name. There is no guarantee that you will ever get the asset back. If you have a falling out with that person, they can simply keep your asset. You certainly cannot ask a court to return an asset that was illegally transferred in order to defraud your creditors.
2. Selling your asset for less than its market value. If you sell an asset for significantly less than its market value, this may be considered an illegal transfer by the bankruptcy trustee. For example, selling your motorcycle to your son for 50% of its value may be considered an illegal transfer by the bankruptcy trustee. The value of the asset, the timing of the sale, and whether or not the asset would have been exempt property will all be considered, but the risk of loss can be avoided with proper planning.
3. Paying off family loans. The bankruptcy trustee will disallow any payments you’ve made to family members or business partners within 90 days before filing bankruptcy. These types of preferences are disallowed in bankruptcy because it leaves other creditors at a disadvantage. Any transaction with a family member within a year before filing is subject to scrutiny. Depending on the amount, the trustee may demand that the family member return the cash for distribution to your creditors.
The best bankruptcies are well planned. You should consult with a bankruptcy attorney before you start transferring any assets. Develop an individual plan, and execute the plan. Bankruptcy should be a once in a lifetime event, and you should take full advantage of the generous benefits that our bankruptcy code offers.