Why You Should Never Give Away Assets Before Filing Bankruptcy

Don't Give Away Anything Before Filing Bankruptcy in San JoseMy firm offers hundreds of free bankruptcy consultations in San Jose every year, and in doing so, we’ve seen just about everything. When I review a potential bankruptcy case and the topic turns to what assets the debtor has, I’ve lost count how many times I’ve been asked, “can’t I just give this car to my son? He drives it anyway.” Here we could just as easily substitute “car” for money, time share, or parcel of land. Whatever the asset, my answer is always an emphatic “no.” You cannot give away or transfer an asset for less than it is worth prior to filing bankruptcy. Such transfers will nearly always be deemed fraudulent transfers. A fraudulent transfer—also called a “fraudulent conveyance”—can result in the bankruptcy trustee “avoiding” the transfer (suing the person to whom the asset has been transferred to recover the asset), and in some cases can even result in denial of the debtor’s bankruptcy discharge.

Bankruptcy Code section 548 (11 U.S.C. §548) defines what constitutes a fraudulent transfer. Briefly, fraudulent transfers made before filing bankruptcy come in two varieties: those involving actual fraud and those where constructive fraud is found. Actual fraud occurs when the debtor made the transfer with “actual intent to hinder, delay, or defraud” the debtor’s creditors. Constructive fraud, on the other hand, most commonly occurs when the debtor transfers an asset for “less than a reasonably equivalent value” and the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer. The Bankruptcy Code also provides for a handful of technical definitions of “insolvency” in the business context.

Under Bankruptcy Code section 548 the bankruptcy trustee can “avoid” any fraudulent transfer that was made within two years prior to the debtor’s bankruptcy filing. That means the family member or friend who received that car, money, property or other asset (again, either as an outright gift, or even after paying less than its full worth) can expect to be sued by the bankruptcy trustee to demand the return of the asset. For fraudulent transfers made more than two years before the filing, Bankruptcy Code section 544 allows the bankruptcy trustee to rely on state fraudulent transfer law, and step into the shoes of a creditor in order to likewise recover the asset for the bankruptcy estate. California’s fraudulent transfer law provides a substantially longer look back period of up to seven years. Additionally, if the debtor made a transfer to a self-settled trust of which the debtor is a beneficiary, and if the transfer was made with actual intent to defraud his creditors, the Bankruptcy Code provides for an even longer look back period of ten years.

Fraudulent transfers invariably cause a huge amount of grief for bankruptcy debtors and for their family members or friends who received the asset. Possibly the most disastrous consequence of a fraudulent transfer before filing bankruptcy is the possible denial of the debtor’s bankruptcy discharge. Under Bankruptcy Code section 727, any fraudulent transfer involving “actual intent to hinder, delay, or defraud” creditors, if the transfer occurred within one year before the bankruptcy filing, can disqualify the debtor from receiving a discharge at all.

Transferring an asset before filing bankruptcy—whether as a gift, or at a bargain price—is never a good idea. Even if your intent is not actually fraudulent, you should still never make such a transfer because doing so will nearly always cause grief for everyone involved, both you and the person to whom you transfer the asset. Because fraudulent transfers are a particularly complicated area of bankruptcy law, it is particularly important that you always seek the advice of a knowledgeable bankruptcy attorney if you are thinking about filing bankruptcy.


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