It’s instinctual to hide when trouble looms.
When creditors are closing in, you think about protecting things you might lose to the creditor.
So, people in financial trouble often consider changing the title to their home or their car.
They think about giving assets away to friends or family. That seems like a better outcome than losing the asset to a creditor.
The only trouble is: it doesn’t work under the law.
Sham transfers get recipients sued
For at least 400 years, people who owe money have been prohibited from disposing of their goods to frustrate their creditors.
Fraudulent transfer or fraudulent conveyance are alternative terms to describe the idea that you can’t give away your wealth when you owe money.
The law is the same under both state law and bankruptcy law: gifts or sham transfers are not effective to put your assets beyond the reach of creditors.
All a fraudulent transfer accomplishes is to set the recipient up to be sued.
Sale OK if the price is right
This doesn’t mean that someone in debt can’t sell their assets. It means that they have to get a fair price for what’s being sold.
No Rolex watches for $1 or vacation homes for $500.
If you make an attempt to find what something like the object you are selling is going for and do the best under the circumstances to a fair price, a sale won’t offend the law.
Trustees can avoid fraudulent transfers
Transfers that are made with the intent to keep assets from creditors or made for token prices can be challenged by a bankruptcy trustee.
The trustee can sue the person who got the debtor’s assets if the assets were transferred within two years of the bankruptcy filing.
The bankruptcy trustee not only has the avoidance powers that the Bankruptcy Code gives him, he has the rights of an unsecured creditor with a judgment under the law of the state where the case is pending.
Worse, making a fraudulent transfer can result in the denial of discharge in bankruptcy (11 U.S.C. 727) for the debtor who made the transfer.
Keep your assets in Chapter 13
Resist the urge to hide your assets. Talk over your options and your exemption opportunities with your bankruptcy lawyer.
If you have more assets than you can protect with the available exemptions, consider filing Chapter 13.
In Chapter 13, the debtor generally keeps all of their property. Payments to the Chapter 13 plan give creditors what they would have gotten in the case if it were under Chapter 7 instead.
Image courtesy of blackpanther.