Consider Credit Problems Before Transferring Property

I was recently contacted by a colleague who was looking for suggestions to deal with a difficult situation. She was preparing to file a bankruptcy for a client whose father had transferred his house to the client. The home is free and clear of any mortgages, but is now owned by someone who has credit problems.

This is a fairly common occurrence, especially with elderly parents. Property is transferred to a family member rather than making a will, or trusting to probate. It’s simple and easy, and it doesn’t cost much to get a deed drawn up and recorded. The cost, however, may not be clear until later. If property is transferred to someone with credit problems, the property can be at risk of seizure by those creditors, or in bankruptcy, not to mention the risk that a family member in financial trouble may be tempted to mortgage the property, or sell it.

When you have worked hard all your life to pay off a home, or anything else, you want your loved ones to get the benefit of that property, not their creditors. There are ways to make sure of that, without risking the property going to their creditors. It is not as difficult as you might think to create a trust, which will own the property, allowing the original owner or other family members the right to live there, without the risks of transferring the property outright. (There are some other ways of accomplishing the same goal, too.) A trust can be created during your lifetime (lawyers call that inter vivos, or the creation of the trust can be through a will (called testamentary). In my experience, people are resistant to the idea of creating a trust–I guess it seems like overkill, or just for the very wealthy. But it is really not that difficult, and if you have a home or other assets to protect, it is important to do it right. Some prefer the idea of transferring property while retaining a life estate (i.e., the original owner retains the right to use the property during his lifetime). However, the part that is transferred away, called a remainder after life estate, still has value, and can still be reached by creditors. That is especially problematic if the property in question has significant value.

If the property has already been transferred outright, you might wonder why I don’t advise just deeding it back before filing bankruptcy. Well, it won’t help, is why not. Such a transfer is avoidable as a fraudulent conveyance in bankruptcy, and probably outside of bankruptcy as well.

If you are the recipient of such a transfer, be sure that you discuss it with your bankruptcy lawyer. She will be able to advise how to proceed (or even advise alternatives to bankruptcy) to minimize the risk to such property. And if you are experiencing financial problems, and you know that someone is considering transferring property to you, or leaving property to you, you may want to bring up the idea of a trust. It may mean ‘fessing up to your financial problems, but it’s worth it to avoid the risk of losing family property.