SHOULD I TRANSFER THIS ASSET BEFORE I FILE?
Something along the lines of “Should I give asset X to my kids before we file” or “should I repay my friend before I file” are among the most frequent and most disconcerting questions I am asked on a regular basis from my clients and prospective clients. Given the regularity in which such questions are asked I put it high on the list of why clients need counsel to go through the bankruptcy process.
Before I go into the many reasons why such transfers are almost always a bad idea, let’s take a quick look at the impulse to do it. Let’s face it, you’re going into terra incognita when you’re filing bankruptcy. To you it seems like a black box or a dark tunnel that you’re entering because you don’t know how it works. Just like you hide your jewelry in your house from a potential thief, it is natural to want to hide assets from your creditors, or to prefer your friends and family. Not knowing there are other methods of protecting property and better ways to plan, you fall back on what you do know how to do.
However, the bankruptcy process puts the bright light of day onto all aspects of your financial condition and transactions, hopefully because you do it voluntarily, or in a worst case scenario because the Trustee or a creditor discovers it on their own inquiry.
Here are the three main reasons to avoid prepetition transfers.
Any transfer made within one to four years (or longer depending on the statute used and whether there was concealment) can be “avoided” or set aside if it was done with either (1) the intent to delay, hinder or defraud creditors, or (2) for less than adequate consideration (less than the value of the thing transferred). Either your intent or a big mismatch between what you gave and got is enough for a judge to “void” the transfer so that it is as if it had never happened.
So for example, you have a car free and clear that you transfer title to your daughter 11 months before filing. The Statement of Financial Affairs asks about any transfers in the last two years. You disclose it, thereby avoiding any Denial of Discharge issues (see section below), but the Trustee sues your daughter to get the car back and sells it for the benefit of your creditors anyway.
The system is all about fairness, not just to debtors, but also creditors. That all creditors of the same class should be treated equally is a basic tenet of bankruptcy law and practice. To accomplish this if someone was paid a debt within 90 days, even if a complete stranger or in an arms length business transaction, then the trustee can sue the creditor who obtained this transfer deemed preferential and put it back into the estate for the benefit of all the general unsecured creditors. If the transferee (the one who received the money or property) is an “insider” such as a relative, business partner, or friend, then the “look back” period is a year. So these transfers can be set aside even if they are not fraudulent as described above.
DENIAL OF DISCHARGE
If an transfer is done in bad faith, such as a fraudulent transfer, or even of property that may have been available to pay creditors simply “disappears” without an adequate good faith explanation, then the entire discharge of a debtor can be denied. As a general floor my clients owe at least $30,000 and more often have six or even seven figures of unsecured debt to discharge in their bankruptcy. So having a discharge denied is very, very expensive. Moreover, much of that debt carries high interest, and so having your discharge denied is a financial death sentence for many debtors. It is not worth risking if you’re insolvent because the fact is that if you’re insolvent you almost by definition have less than you owe. The thing you would be tempted to conceal through transfer is almost certainly minimal compared to the value of your discharge.
THE GOOD NEWS
The good news is that there are perfectly legal ways to avoid the ill effects discussed above. For one thing, you’re in control of the timing of your case. Moreover, exemption planning is perfectly legal and expected. If you’re fully forthcoming with your attorney both about the facts and circumstances of your case, as well as what your goals are for the outcome, then there are proper ways to achieve those ends without taking any unnecessary risks in attempting to circumvent the bankruptcy system.