Last week, I wrote about a common concern that people have when thinking about a bankruptcy filing: the entanglement of family members in the potential client’s financial affairs. I wrote about the effect a bankruptcy has on a non-filing spouse and the issues in bankruptcy that come up when a relative has co-signed on a financial obligation with a bankruptcy debtor.
It is not uncommon for individuals experiencing financial trouble to own personal or real property that has been in the family for a significant time or is used by multiple family members. In some cases, property owned by a person in financial distress is co-owned by that person with family members.
And so often - this co-owned property is not exempt from creditors. Examples include recreational vehicles, such as boats, snowmobiles, and four-wheelers. Hunting property or a lake cabin are other examples of property commonly used and/or owned by other family members besides the debtor. Often, the property in question carries emotional attachments that make it valuable to the people involved - the boat given to the debtor by parents or grandparents or the lake cabin that has been in the family for generations.
When a person in this situation realizes that this commonly owned property is vulnerable to collection by creditors, a normal human reaction is to want to “get rid” of the asset—and in most cases, that means transferring ownership out of the person’s name who is in financial trouble. So the title is transferred, or deeds are signed so that the property remains in the family and, the family thinks, protected from creditors.
This is not the case, however. Section 548 of the bankruptcy code allows Chapter 7 bankruptcy trustees to “avoid” transfers by bankruptcy debtors to other individuals if the transfer takes place less than two years before a bankruptcy case is filed. The transfer is done with either the intent to avoid and frustrate creditors or, if that cannot be established, the persons to whom the property is transferred pay less than fair market value for ownership. The bankruptcy court oversees these transfers and can reverse them if they are deemed fraudulent.
Section 548 applies to all transfers. The person who receives the property need not be related to the bankruptcy debtor, but the requirement that the property be exchanged for less than fair market value means that the person who receives the property is likely related to the bankruptcy debtor. Engaging in such transfers can be considered bankruptcy fraud, which carries severe legal consequences.
In Minnesota, even if the transfer occurred more than two years before the bankruptcy case was filed, the debtor/transferor may not be out of the financial woods. Minnesota state law has a Fraudulent Conveyance law (somewhat different from the bankruptcy code fraudulent transfer) that Chapter 7 trustees can use to avoid these transfers.
Unlike the bankruptcy code fraudulent transfer, which does not necessarily require improper intent, the state fraudulent conveyance law requires that the transferor transfer the property to frustrate and delay creditors. The look-back period for state law fraudulent conveyances is six years.
So, what should a debtor do when a transfer has been made, and the debtor needs to file a bankruptcy case? The debtor has options.
First, in some cases, the asset is exempt under bankruptcy law—for instance, one modestly valued car or truck is exempt. In cases like this, the wisest thing to do is to “undo” the transfer—that is, transfer the asset back into the debtor’s name. If you transfer property before filing for bankruptcy, it is crucial to understand the potential legal ramifications.
But in many cases, the asset is not exempt, and a transfer back into the debtor’s name may not be practical or feasible. When that happens, one option is to understand that the bankruptcy trustee will recover the property or pay a fair value for the transferred property. In a co-owned asset, a Chapter 7 trustee may be willing to work out an agreement where the debtor or the family member pays for the debtor’s interest in the transferred asset.
In cases where the debtor had a minority interest in the property - let’s say a 25% interest in hunting property, the trustee might be willing to receive less than 25% of the fair market value of the property as a settlement since a minority interest in the property is difficult to sell on the open market. So a cash settlement, in cases where the transfer cannot be undone and where filing a bankruptcy case promptly is necessary, might be the best (although expensive) way to resolve the transfer.
However, the most common approach to protecting debtors’ families where there has been a transfer is to have the debtor file a chapter 13 bankruptcy. One of the main differences between a chapter 7 and chapter 13 trustee is that while a chapter 7 trustee is a liquidating trustee, capable of taking over non-exempt assets, liquidating the assets and paying creditors, the chapter 13 trustee is not a liquidating trustee.
The Chapter 13 trustee does not have the legal ability to liquidate a bankruptcy debtor’s assets. Instead, to get a Chapter 13 plan confirmed, the debtor must propose a plan that will pay unsecured creditors as much money as they would receive from liquidating a non-exempt asset and/or avoiding a property transfer.
So for a person who is suffering financially, who has, within the last several years, transferred money or property to a relative, chapter 13 is, in most cases, the most viable option to protect family members from the possibility of a bankruptcy trustee requiring the family member to turn over to the bankruptcy estate valuable, and cherished property. Protection of family members when there has been a transfer is a good reason to
Bankruptcy trustees scrutinize asset transfers made within a specific timeframe before filing. A preferential transfer, which involves paying back certain creditors before filing, can also be scrutinized during this period. Federally, this “look-back period” is two years. However, Minnesota state law extends this to six years for fraudulent conveyances.
This means even transfers made years ago could be reversed if intended to defraud creditors. Understanding these timelines is crucial when considering bankruptcy, especially if you’ve made any recent financial decisions involving transferring assets to family or friends. Acting proactively and seeking legal counsel can help you navigate this complex landscape.
Not every transfer is considered fraudulent. Understanding the bankruptcy process is crucial to ensure all transactions are documented and legitimate. Legitimate transactions, like selling a car for fair market value or paying off a legitimate debt, are generally permissible.
The key is to ensure transfers are done in good faith, for fair consideration, and without intending to deceive or disadvantage creditors. Documenting these transactions thoroughly is crucial, providing a clear paper trail demonstrating the transfer's legitimacy and the value exchanged.
If you’ve transferred assets before considering bankruptcy, meticulous documentation is essential. This includes keeping detailed records of all bank accounts and transactions, including bills of sale, transfer deeds, loan agreements, bank statements, and any correspondence related to the transaction.
Comprehensive records can demonstrate the legitimacy of transfers and protect you from potential challenges by the bankruptcy trustee. Even seemingly minor details, like emails or text messages discussing the transfer, can be invaluable in proving your good intentions.
To avoid a transfer, the bankruptcy trustee must prove the debtor acted with fraudulent intent—the specific goal of hindering, delaying, or defrauding creditors. For instance, transferring funds from a bank account shortly before filing can raise suspicions.
While intent can be difficult to prove, red flags like transfers made shortly before filing, transfers to family members, or transfers for little to no compensation can raise suspicions and lead to further investigation. The trustee may also examine the debtor’s financial circumstances during the transfer and any communications related to the transaction.
If a transfer is fraudulent, the recipient must return the property to the bankruptcy estate. Consulting with experienced bankruptcy lawyers can help you understand the potential risks and consequences.
In some cases, they might keep the property by paying its fair market value to the estate. This can be costly, potentially impacting the recipient’s finances and relationships. It underscores the importance of seeking legal counsel early on to understand the potential risks and consequences of asset transfers before filing for bankruptcy.
If you’re considering bankruptcy and have made recent transfers, consulting an experienced bankruptcy attorney is crucial. The bankruptcy court will scrutinize all recent transfers to ensure compliance with bankruptcy laws. They can help you assess the situation, understand potential risks, and develop a strategy to protect your assets and your family’s interests.
Remember, transparency and honesty are key when dealing with bankruptcy; attempting to hide assets can have severe consequences, including denial of your bankruptcy discharge or even criminal charges. Early consultation with an attorney can help prevent costly mistakes and ensure your financial fresh start is successful.
Facing bankruptcy due to overwhelming debt? Worried about recent asset transfers? Don’t navigate the complex bankruptcy landscape alone. LifeBack Law Firm has experienced attorneys who specialize in bankruptcy law and understand the unique challenges you face.
We offer a FREE, no-obligation consultation to discuss your situation, assess your options, and develop a personalized strategy to protect your assets and your family. Don’t let fear or uncertainty hold you back. Take the first step toward a fresh financial start. Contact LifeBack Law Firm today and regain control of your financial future.
Schedule your consultation and start your journey towards financial freedom.