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Friday, March 16, 2012

Asset Transfers Prior to Bankruptcy: Can I just give my son the Corvette?

Attorney David Shook

This is the first in a series of guest blog posts from Clarkston-based Attorney David Shook, who has a law practice focused on consumer and small business bankruptcy.

As dad said, you can do that, but be prepared for the results.  Folks are terrified they are going to “loose everything” in a bankruptcy. 

The fact is the Bankruptcy Code allows the debtor to keep assets with no equity or up to a fixed dollar amount, through a process of exemptions.  The vast majority of bankruptcy cases are no asset cases where the debtor loses nothing. 

While the billboards I see proclaiming, “lose the debt, keep your stuff”, are rather extreme, this proclamation is more accurate than the misconception that the bankruptcy court takes all your possessions. 

In spite of the facts, too many people transfer assets to friends and family as the creditors begin to circle; in some cases with bad results. 

The Bankruptcy Code makes the results of transferring an asset very clear. “Transfers made with the intent to hinder defraud or delay creditors,” within one year of filing a bankruptcy is a basis to deny or revoke the discharge of a debtor.  In addition, transfers made in up to 6-years prior to filing the bankruptcy petition, regardless of the intent of the Debtor, may be avoided by a creditor or bankruptcy trustee, and can be liquidated to benefit creditors. 

I tell clients on a regular basis, people do things in the normal course of life that are not an issue, until you file a bankruptcy.  There may be legal defenses, in addition to practical considerations, but the graduation gift of $10,000 five years ago could very well be an issue in today’s bankruptcy filing.

The most extreme result of transferring an asset is rather nasty.  The Debtor’s discharge may be denied, and the person you transfer the asset to may very well be sued.  If the Trustee is successful, the asset is returned to the Estate, and sold for the benefit of the creditors. 

Thus every debt included in the bankruptcy is ruled non-dischargeable in the case, and any future cases.  The brother (or son) is on the bad side of a federal lawsuit, and if the Trustee wins, the Corvette is sold and the proceeds paid to creditors. This is not what I would call a good outcome.

Payments to creditors on legitimate debts may also cause issues in a bankruptcy case. Payments within 90 days to any creditor, or 1 year to “Insiders” (think family, and business associates), called preferences in bankruptcy-speak, may be avoided and used to pay all creditors.  Thus, using your tax refund to pay off the $3,000 loan from your sister, on the eve of bankruptcy, is never a good move. 

To add to the penalty for voluntary preferences, or any other transfer for that matter, normally a debtor can exempt and keep (I will address exemptions in a future post) the same $3,000.00 as part of a bankruptcy proceeding and pay the family after the case has completed.  However, if the same amount is voluntary transferred (vs. garnishment or other creditor action), and then recovered by the Trustee, the Debtor is not allowed an exemption in the recovered asset.     
The issues surrounding the return of preferential payments to the estate are normally much less of concern to a client.  Most Debtors have little concern over the fact any one credit card company is forced to return the $1,000 payment made within 90 days of filing.  However, having to wait 7 months to allow the year to run on the money paid to mom, or any other close family member, can rattle the nerves.

Involuntary transfers (again think garnishment of wages) made within the 90 days may also be recovered, quite possibly to the benefit of the debtor.  In certain circumstances, a bankruptcy will not only force the creditor to stop garnishment, but allow the debtor to recover and keep the amount taken by the creditor.

As with any legal issue, get professional advice from an attorney who practices in your area of concern.  No matter how skilled the practitioner, the web is no substitute for a legal consultation.

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July 29, 2013 at 7:20 AM 

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