The rules for filing a bankruptcy are complicated. They’re designed to make sure you get treated fairly but also to protect your creditors as much as possible. The courts want to make sure you’re not hiding any property from the bankruptcy process. For that reason, you can’t transfer valuable property to a friend or family member right before you file a bankruptcy. If you do, the court may consider the transfer to be a kind of fraud and may undo it or dismiss your case.
When Is An Asset Transfer “Fraudulent” In Bankruptcy?
Honest people make honest mistakes. The problems grow when those mistakes cost you despite your best intentions. Let’s say you gave your son or daughter an old but somewhat valuable piece of jewelry. At the time you bestowed this family heirloom upon your child you had no intention of filing bankruptcy in the foreseeable future. However, as we all know, circumstances have a way of changing and months later you find yourself in a Chapter 7 bankruptcy. Unfortunately, the United States Bankruptcy Code, 11 U.S.C. § 548 does not look kindly on your gift giving and defines “fraudulent transfers” as any transfer by the debtor, within two years of the filing of the bankruptcy, whether intended to be fraudulent or not, where the debtor received less than a “reasonably equivalent value in exchange for such transfer.” But wait, there’s more…California state law allows a four year “look back” period under its Uniform Fraudulent Transfers Act (UFTA), with additional time for certain exceptions, but in any event, never longer than seven years. See Cal. Civ. Code § 3439.09.
While your actions did not rise to the level of actual fraud to hinder, delay, or defraud the court or your creditors, they constitute what lawyers and courts refer to as “constructive fraud.” In other words, you did not intend to commit fraud, but you transferred an asset within two years (and four years under the UFTA) for less than the reasonably equivalent value of the item. Consequently, the U.S. trustee can and probably will sue your child to get the jewelry back. This is called “unwinding” the transfer or unwinding the sale. Then the trustee can use the property to benefit your creditors. Obviously, this is not the scenario you had in mind when you filed bankruptcy.
In our hypothetical, it appears you will ultimately find yourself on the wrong end of the U.S. Bankruptcy Code. Moreover, even harsher consequences loom when the transfer occurred within one year of the filing. Under 11 U.S.C. § 727, the Bankruptcy Court can altogether deny you a discharge based upon the transfer of an asset within one year prior to the filing of your bankruptcy!
How To Fix Your Asset Mix Up
If you are filing bankruptcy in California and you have made an innocuous asset transfer within four years, you will want to pay close attention to a case out of the U.S. Ninth Circuit Court of Appeals. In In Re Adeeb, 787 F.2d 1339 (9th Cir. 1986). There the Ninth Circuit Court held that in order to qualify as a fraudulently transferred asset, the asset must have remained transferred at the date of the filing of the bankruptcy case. In other words, if you recover your asset prior to the filing of the bankruptcy, you will be in good shape. Make certain that the recovery of the asset is clear. Go get your jewelry back! If you transferred an asset by signing title over, have the title signed back to you. If there is a contract or other document that memorializes the transfer of the asset, then create a new document transferring it back to you. You want it to be clear for trustee and the court not only that your intent was not to fraudulently transfer any asset, but that the asset is no longer transferred. Additionally, you want to ensure you have a record of your assets. Also remember, you can transfer the asset free and clear as long as you get a reasonably equivalent value in exchange. So there is nothing to stop you from selling your things at fair market value. But do some research so that you can back up that amount. You want to be able to explain how you arrived at the price.
What if you can’t get the asset back from the other party and you can’t get paid? You will need to postpone your bankruptcy filing out of an abundance of caution. Once the look back period has expired, the trustee cannot touch the transfer. But if you absolutely cannot postpone filing bankruptcy, you might want to look at filing a Chapter 13, also known as a wage earner. There are a variety of issues to consider. Deciding which Chapter is right for you and discussing the differences is something that should be done with a professional.
What You Need To Do
Before making any final decisions regarding when and if you should file bankruptcy, be completely honest with your bankruptcy attorney. If you don’t tell him or her about a transfer or if you don’t think it “counts” you could be wrong. That mistake could cost you dearly in the end. Only once your bankruptcy attorney has all of the facts can he or she make a legitimate assessment of your circumstances and give you sound legal advice.
Contact our expert bankruptcy attorneys for a free consultation today to learn about how to manage your bankruptcy case.