Can I Give/Sell/Deed This Property To . . . .

Whenever someone has some property and too much debt, they want to know how they can protect the property from creditors.  The general rule is that you can use exemptions.  But sometimes, the property does not fit into an exemption category or it exceeds the allowed exemption.  Your first instinct may be to sell the property or to give it away, but before you do that you should talk to an experienced bankruptcy lawyer.

Transferring property in the two years before filing bankruptcy may have some unintended consequences.  This is because the Bankruptcy Code requires you to document property transfers.  In some cases, a bankruptcy trustee can undo an improper property transfer.  In extreme cases, a property transfer can be the basis for a denial of discharge adversary proceeding.  Before you get too worried, property transfers are allowed provided that you take the right step.

Tell Your Bankruptcy Lawyer

Not telling your bankruptcy lawyer about a property transfer is the single biggest way that you can get into trouble with a property transfer.  Accurate and timely disclosures are the best way to avoid problems in your bankruptcy.  If your bankruptcy lawyer does not ask you about property transfers at all, that should be a red flag that your lawyer is not experienced or is not doing thorough job.

If you tell your bankruptcy lawyer ahead of time and he finds a problem with the transfer, then there is time to fix it. There are many ways to undo a property transfer before it is too late.

Understand What A Property Transfer Is

If you give, sell, deed, sign over, or anything like that, you have done a property.  In fact, if you have a corporation and you increase the number of shares or the number of shareholders, that is a property transfer.  You do not even have to give away all of a piece of property.   For instance, if you give someone a fractional interest in property, that is still a property transfer.  Remember, it does not matter if the property changes possession, as long as a change in legal ownership occurs there is a transfer. Finally, even paying back a debt is a transfer.

What Are The Property Transfer Red Flags

There are two red flags: 1) timing, and 2) amount.  The Bankruptcy Code seeks to protect the interests of all parties, including creditors, in evaluating transfers.  A transfer that raises a red flag is a transfer that unfairly puts property out of the reach of your creditors.  Now, I understand that you may want to keep property out of your creditor’s hands, but there are better and more legitimate ways to do it than an improper transfer.

The first issue is amount.  You cannot sell a car for $1 to your brother.  That’s called a fraudulent transfer.  Anytime you sell property, you have to get its “reasonably equivalent value” in payment.  That means that property worth $10,000 must be sold for $10,000 or close to it.  Now I understand that valuations change.  So the best thing to do is to keep a record of how you valued the property at the time of sale.  Then if the sale was for less than the property’s “book” value, you are in a better position to explain how you arrived at the same price and you can show that the price was the reasonable result of negotiations.

The second issue is timing.  If you sold a car to your brother for $1 ten years before filing bankruptcy, not a problem.  If you sold a car to your brother for $1 ten weeks before filing bankruptcy, that’s a problem.  The closer you get to filing bankruptcy, the more scrutiny there is on transactions.  The same is true if you pay back a debt.  The closer you are to the date of filing, the greater the potential problems.  This is why it is good to talk to a bankruptcy lawyer as soon as you think you need to file bankruptcy.  That way you can understand how to properly make and disclose transfers.

So What Happens If I Made An Improper Transfers

Well it depends.  Usually, the trustee will tell you that the transfer is no good before he does anything.  If you think that he’s wrong, your bankruptcy attorney can litigate it for you.  For instance, if you sold your car to your brother for $1 the month before filing bankruptcy, then the best thing to do is get your brother to sign the car back to you.  That way everything is simple and hassle free.

Bigger problems arise if you transferred money to someone, because money has a way of getting spent.  If the amount is relatively small and there is little hope of recovery, the trustee may choose to ignore it.  If it is a large amount of money, the trustee will file a lawsuit to recover it.  It can be very unpleasant to have the trustee suing your family members.  This is where it helps to have retained a bankruptcy lawyer.  Your lawyer can help you either time the petition or structure the petition so that your family does not get sued.

This is very rare and you have to do it intentionally, so 99.99% of you don’t have to worry; but, I just thought I’d mention it.  If you do a transfer in such a way that the property cannot be recovered at all and it looks like you did it that way on purpose, you could lose your discharge.  The court takes a harsh view of people that intentionally structure a case so that their assets cannot be reached.  If you are in the .01% that might be thinking about doing this, don’t.  It’s not worth it.  There is always a better alternative that will not cause legal problems for you.

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