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The Dangers of Selling or Transferring Property Prior to Bankruptcy

It can be tempting to want to transfer property prior to filing for bankruptcy, especially if the filer has concerns that he or she might lose this property once the case is filed.

However, this idea is not only risky; it can also result in the bankruptcy being dismissed, the property being recovered by the trustee and/or criminal charges brought against the filer.

Factors Considered

Not all pre-bankruptcy transfers will land the filer in trouble. Several factors will be reviewed and considered when it comes to transferring or selling property prior to bankruptcy, including the following:

  1. Was the property exempt or nonexempt?
  2. When was the transfer made?
  3. Did the seller receive fair market value for the property?
  4. How did the seller spend the proceeds?
  5. Why did the seller make the transfer?

Exempt Versus Nonexempt Property

Normally, selling or transferring property that is considered “exempt” under the bankruptcy laws is acceptable. Exempt property may include a homestead, automobile, clothes, jewelry, retirement accounts and life insurance policies. It is when the seller is selling or transferring “non-exempt” property that he or she can get in trouble. Non-exempt property may include rental properties, stocks, bonds, jewelry and proceeds from lawsuits or inheritances.

Exempt property is covered by exemptions laws that allow the filer to protect certain property from creditors in a bankruptcy. Nonexempt property is not covered by a legal exemption and is normally sold by the bankruptcy trustee to pay unsecured creditors.

Selling exempt property is not normally a problem because the property would not be touchable otherwise by the creditors.

Many people believe that they can sell their nonexempt property to pay down mortgages or other debts associated with the exempt property or use the proceeds to buy more exempt property. This type of pre-bankruptcy planning, however, raises major red flags and can end up getting the filer into trouble.

Look-Back Period

Another important consideration the bankruptcy court will make when it comes to property sold or transferred prior to bankruptcy is how recently the transfers were made.

Bankruptcy courts designate a certain amount of time between a pre-bankruptcy transfer or sale and the date the bankruptcy petition was filed. Depending on the type of bankruptcy filed and the type of property sold, the court can look back as far as ten years, if necessary.

The closer in date the sale was to the time the petition was filed, the more likely the sale or transfer was made with deceptive intent.

How Much Did the Filer Receive?

The bankruptcy trustee will also look at how much the filer received in the sale of the property. If the sale price was less than the fair market value for the property, the trustee may view the transaction as one that was meant to deceive or hide property.

The bankruptcy trustee does have the power to file a lawsuit to recover the transferred property if the sale or transfer was made at least two years prior to the bankruptcy, possibly more.

Once the trustee recovers the sold or transferred property, the person who was a part of the transaction could try to make a claim in the bankruptcy case as a creditor to get his or her money back.

If the property ends up being property that could have been exempted in the bankruptcy, the filer will lose his or her right to claim that exemption because of the fraudulent transfer or sale.

What Was Done with the Proceeds?

The bankruptcy trustee will also closely examine what was done with the proceeds of the sale.

If the filer purchased new “exempt” property with the proceeds, thereby increasing the value of already-existing exempt property, the transfer or sale could be seen as fraudulent. It could also been seen this way if the proceeds were used to buy luxury items.

If the filer used the proceeds to pay one creditor but not others by paying down that debt first with the proceeds, the bankruptcy trustee can file a lawsuit against the creditor to recover the money or property so that all creditors are treated equally.

This rule also applies to any payments made by the filer to general creditors within 90 days before the filing or to creditors who are considered “inside,” meaning family or friends, within one year before filing.

Determining Intent

A lot of what the bankruptcy trustee decides to do hinges on the intent of the filer. The trustee will look at the circumstances surrounding the transfer or sale and will also consider the testimony of the filer.

The court will also look at a number of factors, including: whether the seller still retained control over the property, whether the transfer was made after someone made a threat to sue the filer, whether the transfer was concealed, what was done with the proceeds, whether the seller received fair market value for the property and what he or she had left after the sale or transfer.

CONTACT AN ARLINGTON BANKRUPTCY ATTORNEY FOR A FREE CONSULTATION TODAY

An experienced Texas bankruptcy lawyer can help you with any questions you may have about obtaining relief from debt through the bankruptcy process. Please call the Law Office of Marilyn D. Garner now at (817) 505-1499 now for a free strategy session to discuss how bankruptcy may help you.

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