One of the hardest ideas to convey to those filing bankruptcy is that creditors, just by holding your debt, have legal rights in your assets. That right manifests itself in the prohibition against “fraudulent transfers“.
A fraudulent transfer is one either 1) intended to put an asset beyond the reach of creditors or 2) made for less than equivalent value.
Can’t tell the number of times that clients propose to put their property in the name of a friend or family member or give it away so they don’t have to list it in the bankruptcy schedules. The misconception is that if it “isn’t in my name” the trustee doesn’t have to know about it. Wrong.
Debtor-creditor law does not prohibit a debtor from selling his assets for their fair market value. At the end of such a transaction, the debtor’s net worth is unchanged. Instead of an asset, the debtor has the sale price. The bundle of assets available for creditors is unchanged.
If the debtor gives the asset away, the debtor’s net worth is diminished, and there is less to pay creditor’s claims. That’s a fraudulent transfer and a bankruptcy trustee can unwind it. Fraudulent transfers taken to extremes can cost the debtor his discharge.
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