There are a few things debtors can do before filing bankruptcy that can end up hurting their bankruptcy case. In some cases, those actions taken before filing for bankruptcy can result in the loss of property or not receiving a discharge.
If you are having financial problems, it may seem logical to sell items for cash, which you can use to pay your bills. However, selling or transferring property right before filing bankruptcy can cause problems with your bankruptcy case, as well as for the people who received those items. Improper asset transfers can lead to serious consequences, including bankruptcy fraud.
Transfers before Filing for Bankruptcy
Bankruptcy laws prohibit debtors from disposing of assets before filing bankruptcy for less than fair market value. “Transfers of property” include selling assets or giving them away. If a debtor sells an asset before filing bankruptcy, the trustee appointed to administer the case will investigate the transfer to determine if the transfer was fraudulent. A fraudulent transfer is one in which the debtor gave the property away for no value or sold the property for less than the property is worth.
For example, if you own a boat that is worth $5,000 but sold the boat for $1,000 two months before filing bankruptcy, a Chapter 7 trustee has the right to sue the buyer to void the transfer. The trustee will then sell the property and use the money to pay your creditors. In a Chapter 13 case, the trustee will not void the transfer; however, you will be required to pay the difference between the sales price and the value of the item to your unsecured creditors through your bankruptcy plan. This will increase the amount of your monthly payments.
Another example of a fraudulent transfer is when a debtor gives his boat to a relative to “hold” during the bankruptcy so that the trustee will not sell the boat in order to pay creditors. The trustee will void the transfer and take the boat. Giving away your property to hide it from the bankruptcy trustee is a bankruptcy crime that is punishable by fines and possible jail time. Fraudulent transfers can lead to criminal charges for bankruptcy fraud, especially if there are indicators of intentional asset concealment to evade creditors.
Is There a Right Way to Sell Property Before Filing for Bankruptcy?
You can sell property before filing bankruptcy; however, you must make sure that the property is sold for the fair market value. If you sell any assets before filing for bankruptcy, you must report the transfer on your bankruptcy schedules and account for the money you received for the sale.
If you used the money for pleasure (i.e. a two-week Hawaiian vacation) instead of toward your debt or essential living expenses, this may be viewed as an abuse of the bankruptcy process. However, if you use the funds received from the sale to pay normal living expenses (i.e. rent, mortgage payments, car repairs, clothing, food, etc.), it may be acceptable to sell an item before bankruptcy. However, you must be careful to document exactly how the money was used.
You are also not permitted to use that money to repay relatives within one year of filing bankruptcy. This is considered a preference. The trustee will demand that your relative turn over the money to the bankruptcy trustee. If your relative refuses to return the money to the trustee, the trustee will sue your relative through the bankruptcy court to recover the money you paid him or her. If you want to repay your relative, you must wait until after your bankruptcy case is closed.
Delving Deeper into Pre-Bankruptcy Asset Transfers: When Selling or Gifting Becomes a Problem
Let’s explore the intricacies of transferring assets before filing for bankruptcy. Improper transfers can lead to serious legal consequences, including bankruptcy fraud. Understanding these nuances is crucial to protect yourself legally and ensure a smooth bankruptcy process.
Look-Back Period and Badges of Fraud
The bankruptcy trustee will closely examine any transfers made within a specific timeframe before your bankruptcy filing. This is known as the “look-back period,” and it varies depending on the type of transfer and the chapter of bankruptcy you file.
For most transfers, the look-back period is two years. However, for transfers to insiders (such as family members or business partners), it can be extended to up to four years. In Minnesota, state law allows the trustee to look back even further, up to six years, for fraudulent transfers.
To determine if a transfer was fraudulent, the trustee will look for “badges of fraud.” These are warning signs that indicate the transfer was made with the intent to defraud creditors. Some common badges of fraud include:
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Transfer to an Insider: Giving property to a family member or close friend right before filing bankruptcy raises suspicion.
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Lack of Consideration: Transferring property for little or no value is a red flag.
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Insolvency: If you were insolvent (meaning your debts exceeded your assets) at the time of the transfer, it could be considered fraudulent.
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Concealment: Trying to hide the transfer from creditors or the bankruptcy trustee is a strong indicator of fraud.
If a transfer is identified as fraudulent, it can lead to charges of bankruptcy fraud.
The Role of Intent in Fraudulent Transfers
While the badges of fraud are important indicators, proving fraudulent intent is crucial for the trustee to successfully undo a transfer. This means demonstrating that you transferred property with the specific intention of keeping it away from your creditors. Proving intent to defraud creditors can result in charges of bankruptcy fraud.
Intent can be difficult to prove, but the trustee may consider various factors, such as:
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Your Financial Situation: Were you experiencing financial difficulties at the time of the transfer?
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Timing: Did the transfer occur shortly before you filed for bankruptcy or when you were facing lawsuits or collection actions?
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Statements or Actions: Did you make any statements or take any actions indicating an intent to defraud creditors?
What Happens if a Transfer is Deemed Fraudulent?
If the bankruptcy trustee determines that a transfer was fraudulent, they can take action to recover the property or its value. This could involve:
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Avoidance: The trustee can “avoid” the transfer, meaning it’s as if it never happened. The property is returned to the bankruptcy estate and can be used to pay creditors.
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Recovery: If the property has been sold or is no longer recoverable, the trustee can sue the recipient of the transfer to recover its value.
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Denial of Discharge: In cases of egregious fraud, the court may deny you a discharge, leaving you responsible for your debts.
Fraudulent transfers can also lead to criminal charges for bankruptcy fraud, particularly if there are indicators of intentional asset concealment to evade creditors.
Protecting Yourself: Legal Strategies for Pre-Bankruptcy Transfers
If you need to sell or transfer property before filing bankruptcy, there are legal strategies to protect your interests:
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Consult with an Attorney: An experienced bankruptcy attorney can advise you on how to structure the transfer to minimize the risk of it being considered fraudulent.
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Document Everything: Keep detailed records of the transaction, including the reasons for the transfer, the fair market value of the property, and how the proceeds were used.
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Consider Alternatives: If possible, explore alternatives to selling or transferring property, such as refinancing your debts or negotiating with creditors.
Remember: Bankruptcy laws are complex, and the rules regarding pre-bankruptcy transfers can be nuanced. Don't make any hasty decisions about your assets without consulting a bankruptcy attorney. We can help you understand your rights, protect your property, and navigate the bankruptcy process with confidence.
Consult a Bankruptcy Attorney before Selling Assets or Giving Items Away
If you are struggling financially and considering bankruptcy as an option, you should consult with a bankruptcy attorney before making any decisions to dispose of assets. Your attorney can help you plan a strategy that will be in your best interests. If you are selling an asset, your attorney can advise you how this will affect your bankruptcy filing and how you should use the money you receive from the sale.
If you have sold an asset recently, you can still file a bankruptcy case. This area of bankruptcy law can be complex and involves many elements; having an attorney on your side will make this process much easier.
Help through Your Bankruptcy Process
If you are struggling with paying bills and supporting your family, you can find relief through bankruptcy. Contrary to popular belief, many debtors don't lose any assets through filing bankruptcy – this is a common misconception. So, before you begin selling your property, schedule a free consultation with us and we can help you determine the best plan of action.
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Frequently Asked Questions About Selling or Gifting Property Before Bankruptcy
Can I sell my car before filing for bankruptcy?
Absolutely, but it's crucial to sell it for fair market value. Selling it significantly below its worth could be seen as a fraudulent transfer. Use the proceeds to pay down debts or cover necessary living expenses, and keep meticulous records of the transaction for the bankruptcy trustee.
What if I already gave away property to a family member?
If you gave away property within the look-back period (typically two years) and it's deemed a fraudulent transfer, the bankruptcy trustee can try to recover the property or its value. It's essential to disclose the transfer to your bankruptcy attorney so they can advise you on the best course of action.
Can I pay back a family member who loaned me money before filing for bankruptcy?
Paying back a family member or any creditor within one year of filing could be considered a preferential payment. Consult with your attorney before making such payments. They can determine if it's permissible and guide you on how to document the transaction correctly.
Are there any safe ways to transfer property before bankruptcy?
Yes, you can transfer property for valid reasons, like selling a home to downsize or giving a reasonable gift for a wedding. The key is to ensure the transfer is legitimate, made for fair value, and not done to defraud creditors.
What if I need to sell an asset to pay for essential expenses? Selling assets to cover necessities like rent, food, or medical bills is generally acceptable, but it's important to document how the proceeds were used.
What should I do if I'm unsure whether a transfer was fraudulent?
Don't try to handle this on your own. Consult with a bankruptcy attorney as soon as possible. They can assess your situation, advise you on potential risks, and help you develop a strategy to protect your interests.
