Transferring Property Before Filing Bankruptcy, Without Being Paid For It: How to Fix the Problem, Part Two of Two

11 Apr Transferring Property Before Filing Bankruptcy, Without Being Paid For It: How to Fix the Problem, Part Two of Two

Part One of this article discussed the nature of the legal problems created by a transfer of property (real estate, a stock account, or some other valuable asset), for less than fair value, by a debtor prior to filing bankruptcy. Part Two will discuss what, if anything, can be done to fix these problems.

If the debtor desires to file chapter 7, it is imperative that he or she wait until one year has passed after the transfer. This is because section 727 of the bankruptcy code mandates denial of discharge if the debtor has transferred property with the intent to hinder, delay or defraud a creditor in the one year before the case is filed.

However, section 548 provides that the trustee can recover property transferred for less than fair value in the two years before the case is filed. The debtor cannot exempt such property once it is recovered. Therefore, to avoid the application of section 548, the debtor will need to wait to file bankruptcy until two years has elapsed since the transfer. Furthermore, if the debtor resides in a state with a fraudulent conveyance statute that looks back more than two years (in Minnesota, the look-back period is six years), the debtor may have to wait even longer. Obviously, this begins to become impractical the longer the debtor must wait for the important relief the bankruptcy case can provide.

In some jurisdictions, the property might be able to be transferred back into the debtor’s name prior to filing the bankruptcy. The theory is that the transfer has been “undone,” so there is nothing for the bankruptcy trustee to avoid. While getting the property back almost certainly will not be a defense to a section 727 discharge revocation, it may well constitute a serious disincentive for a bankruptcy trustee contemplating a section 548 avoidance action. Additionally, if the property is claimed exempt in the bankruptcy petition, the trustee may not act quickly enough to avoid the running of the thirty day period for objecting to the debtor’s exemptions. The trustee should then be precluded from seeking avoidance of the transfer.

Another strategy is for the debtor to reverse the transfer and then file chapter 13. This has the important advantage of avoiding the application of section 727’s threat of denial of discharge. However, if this option is chosen within two years of the original transfer, it must be remembered that the chapter 13 trustee might insist that the chapter 13 plan comply with section 1325(a)(4) regarding the transferred property. Section 1325(a)(4) requires that unsecured creditors receive a payment in chapter 13 equal to what they would have received in a hypothetical chapter 7. Some debtors might calculate that the chapter 13 trustee will not raise the issue, which would mean the debtor successfully escapes the effect of having made the transfer, with the result of relatively small chapter 13 plan monthly payment.

It is worth remembering that for some persons, losing property might simply be the price to pay for obtaining a chapter 7 discharge. Accordingly, the debtor should consider the option of simply filing bankruptcy and expecting to lose the transferred asset.

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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