Are Gifts to Friends or Relatives an issue in Bankruptcy?

If you plan on filing bankruptcy it is important to consider any gifts or unusual transfers you have made to family members or friends in the last two years.  When we file your bankruptcy case, we file what is called a “statement of financial affairs”.   It is a disclosure document that goes through your financial history over the last several years. 

This statement asks if within the last two years have you given or transferred any property away to anyone else.  If you did make of these transfers then they must be listed here.  

Many people think that if they do not own anything of value at the time of the bankruptcy, it will proceed smoothly, and they will get their discharge. What we often see are people giving vehicles to their children or transferring a home to a family member. What people don’t know is that the Trustee can look at your transactions over the last two years to see if you gave away or transferred anything of value they might be interested in. 

The reason for this disclosure is to allow the Trustee or creditors to see if you are giving away assets that could have been used or sold to pay them. This doesn’t mean that you can’t give gifts, it just means that the gifts have to be reasonable. If the gift is large and not a normal transfer, the Trustee has some options of what he can do to get it back. This process is sometimes called “avoiding a transfer” or “unwinding a transaction.” 

Under the bankruptcy code, the Trustee may “avoid a transfer” if the person made the transfer or gift with the actual intent to hinder, delay, or defraud a creditor. If the person received less than reasonable equivalent value AND knew he would not be able to pay his debts, or the transfer was made to a family member the Trustee will look at the transaction closely to see if he can get the money or item back. See 11 USC 548 

The Trustee can sue the recipient of the gift to recover the value of the gift. If you file under a Chapter 7, the Trustee could demand the money or the item back from who you gave it to. If you file under a Chapter 13, the Trustee could demand you pay the value of that item into the Chapter 13 plan. The Trustee can also object to the discharge of all debts. 

Charitable donations are usually safe from the Trustee, as are holiday and birthday gifts. However, before you give any large gifts or transfer any property, you should consult with a Bankruptcy attorney to prevent problems in a future filing.

If you have any questions about bankruptcy please feel free to contact us and speak with one of our bankruptcy attorneys.  We have offices in Wichita, Topeka, Lawrence, and Overland Park.  

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