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In a NutshellTransferring property includes selling it or giving it away. If you file bankruptcy, you have to report any property transfers in the two years before you filed on your bankruptcy forms. If the bankruptcy trustee finds that you fraudulent transferred any property, they can undo the transfer to get the property back and sell it to pay your creditors. Read on to learn more about property transfers and how to deal with them when filing bankruptcy.
It’s no surprise that when you file bankruptcy paperwork, you must list all your assets and debts. You’re also required to provide information about your income and expenses. But did you know you must also list any property transfers for the past two years?
Of course, you have the right to transfer your property — that is, to sell it or give it away — at any time, including before you file bankruptcy. But after you file, the bankruptcy trustee has the right to undo any transfers that qualify as fraudulent under the Bankruptcy Code. This article covers what counts as a transfer, what kinds of transfers are considered fraudulent, the consequences for fraudulent transfers, and what you can do if you’ve recently transferred property.
Under the Bankruptcy Code, a transfer is when you sell or give away your legal rights to an asset. For example, selling your car is a transfer. If you let someone else borrow your car for an extended time, but your name is still on the title, that’s not a transfer. Other transactions that don’t count as transfers include:
Everything you own at the time of your bankruptcy filing is considered part of your bankruptcy estate. Your trustee oversees and administers your bankruptcy estate during the bankruptcy process. In a Chapter 7 case, the trustee can liquidate the assets in your estate and use the money to pay your creditors.
Bankruptcy exemptions allow you to claim some of your assets as exempt, meaning the trustee can’t sell them to pay your debts. In theory, the total value of your bankruptcy estate, minus the total value of all your claimed exemptions, is the amount that the trustee can pay to your unsecured creditors. Most people filing Chapter 7 bankruptcy, though, can claim everything in their bankruptcy estate as exempt.
In most cases, there’s no non-exempt property for the trustee to liquidate. Still, one of the trustee’s duties is to make sure your estate contains everything that’s required by the bankruptcy laws. That includes any assets you sold or gave away in a fraudulent transfer. It’s the trustee’s job to undo such transfers and bring those assets back into your estate. In other words, you can’t keep assets that you otherwise wouldn’t be allowed to keep by simply transferring them out of your name before filing your bankruptcy petition.
Under the Bankruptcy Code, the trustee must review any transfer that happened during the two years before you filed your bankruptcy case. This two-year period is sometimes called the “look-back” period. The look-back period is longer for some types of transfers. For example, if you transferred assets to a self-settled trust, the look-back period is 10 years. Your state’s laws may also provide for a longer look-back period for certain kinds of transfers.
Just because a transfer happened during the look-back period, it’s not automatically a fraudulent transfer. The Bankruptcy Code identifies two types of fraudulent transfers (sometimes called fraudulent conveyances): actual fraud and constructive fraud.
The key factor in determining whether a transfer is actual fraud is intent or the reason you transferred the property. A transfer is actual fraud if you transferred an asset with the intent to delay or defraud your creditors. In other words, a transfer is actual fraud if the reason you transferred the asset was to keep your creditors from getting it during your bankruptcy case.
Unlike actual fraud, constructive fraud can happen even if you didn’t intend to deceive or defraud anyone. There are two requirements for a transfer of property to be considered constructive fraud. First, you must have received less than the property was worth at the time. For example, you needed money quickly, so you sold your car for $5,000, even though it was worth $9,000. Giving assets away is another example.
The second requirement for constructive fraud is that you were insolvent at the time of the transfer, or you became insolvent because of the transfer. Insolvent means that the total of your debts is more than the total value of your assets. By law, it’s presumed that you were insolvent during the 90 days before the date you filed bankruptcy. Both requirements must be met for a transfer to be constructive fraud.
Some transfers aren’t considered fraudulent even though the transfer happened during the look-back period. If you sold an asset to someone for fair market value, the transfer usually isn’t fraudulent. In this scenario, the property that left your estate is about the same value as the money or property you received in exchange. In other words, the transfer didn’t affect the overall value of your estate.
If the asset you transferred was exempt, the transfer usually isn’t fraudulent. If you hadn’t transferred the asset and still had it when you filed bankruptcy, would you be able to claim it as exempt? If so, it usually won’t be considered a fraudulent transfer because even if the trustee got the property back, the exemption would prevent them from liquidating or selling it.
Likewise, if you gave away an asset that didn’t have any real market value, the transfer likely isn’t fraudulent. Property with little or no resale value wouldn’t have any meaningful impact on the value of your bankruptcy estate. Put another way, if the trustee got the property back, selling it wouldn’t bring in much money for your estate.