Property Transfers Before Bankruptcy

There are two types of property transactions that can cause issues in your bankruptcy case.  The first are gifts you make to other people.  The second are things you sell for less than their fair market value.   The underlying question is often whether or not your creditors have been denied some potential value that could go to pay their claims in the bankruptcy case.

When you file a bankruptcy case a trustee is appointed to manage things.  You are required to disclose property transfers within the 2 year period prior to filing the bankruptcy.  The bankruptcy trustee has the power to unwind certain transactions you have made before the bankruptcy was filed.  In theory these are transactions that benefited someone else disproportionately.

If you have given away property before filing your bankruptcy case the bankruptcy trustee might be able to recover that property under the bankruptcy laws for up to two years.  As an example if you gave a car to your friend last year and you filed a bankruptcy this year the bankruptcy trustee assigned to your case would have the power to try and take the car back from your friend.

You could also have sold the car to your friend for less that what is was worth.  If you have a $10,000 vehicle and you sell it for $1,000 to your friend then they paid a lot less than what it was worth.  This is an easy example.  A much more difficult one is where you have sold the vehicle for a lesser amount but it is close.

In a Chapter 7 bankruptcy this problem cannot easily be fixed.  The bankruptcy trustee will send a letter to the person that you transferred the vehicle to and normally try to settle the issue by asking for money.  If it is a gift then they want the current value of the vehicle but will often take less to avoid a protracted legal fight.  If it is a sale for less than value then they want the difference between the actual vale and the sale price but once again they might settle for less.

Your friend may have some defenses to the recovery of the vehicle or any money by the bankruptcy trustee.  The most important defense would be that you were not insolvent when you gave or sold them the vehicle.  This defense comes up often.  The idea is that at the time you gave the vehicle away you were worth more money then you owed.  Let’s imagine that you had a house with $100,000 of equity and several vehicles with $20,000 equity total and a retirement account with $60,000 in it.  Against that you owed $60,000 of credit card debt at the time you gave or sold the car.  The defense is that your net worth was in the positive ($120,000) at the time of the transfer.  This shows that you were not transferring the property to prevent your creditors from seizing it.

In a Chapter 13 bankruptcy you might propose to pay the value of the vehicle you gave away or the difference between the sale price and the value to the bankruptcy trustee over a three to five year period of time.  If you agree to that kind of arrangement and the plan is approved then the vehicle will not be recovered by the bankruptcy trustee and your friend will not be sued.  You will instead pay for your friend to keep it.

The types of transfers we have been discussing are known as fraudulent conveyances.  The term fraud in this context does not mean you have committed a crime or done something illegal.  Instead it refers to the idea that you gave something away for less than what it was worth.  In some cases it is a complete gift, in other cases it is just a low price on an item that you sold.

A well known case in Kansas to show how far this idea can go involved free rent over several months.  An owner of an apartment complex knew he was going to file a bankruptcy and told one his tenants (who was a friend) that he could stop paying rent several months before the bankruptcy was filed.  The bankruptcy trustee requested a list of all the tenants and their payment histories.  When the tenant was questioned about their lack of payment it became clear that the landlord had given them free rent for several months before the case was filed.  The bankruptcy trustee sued the tenant on the theory that the free rent was a transfer of property without receiving anything of value – the transfer being the ability to live in the apartment without paying rent.  The Judge in the case agreed and the tenant had to pay the trustee for the rent that had been missed.

It does not matter what type of property has been transferred. It could be a motorcycle, car, boat, jet ski, artwork, collectibles or any other item or thing.  Giving away the use of an object or item without being compensated can also create a transfer of value that could be an issue, such as the free rent case described above.

In many cases the property itself would have been protected by law if you had kept it in your possession.  If you own a car and give it away and it was your only car at the time you made the gift it would have been exempt or protected by law from the bankruptcy trustee if you had kept it.  Because you transferred it away it becomes unprotected.

In most cases giving away property before bankruptcy or selling it for less then it is worth will just make a bankruptcy case more complex.  In some cases it might still make sense.  Please contact us to go over your options before you make any decisions.  Anything you do prior to filing a case would be done better if you were advised by a professional.  We are available for free consultations and happy to help you plan things out.