Can you Exempt Property in Bankruptcy That you Gave Away?

02 Jun Can you Exempt Property in Bankruptcy That you Gave Away?

Recently, a client of mine did just that: gave her car to her daughter a couple of days before filing bankruptcy. What’s worse is that she didn’t tell me about it until after the case was filed.

My office had already prepared the paperwork, and been able to exempt the car under appropriate state law. The trustee couldn’t touch it for the bankruptcy estate.

But you can’t exempt property that doesn’t belong to you. So, having given the car away, the exemption vanishes. Since a transfer of property close to the filing of bankruptcy constitutes a presumed fraudulent conveyance under the bankruptcy code, the trustee can take the car and sell it to pay unsecured creditors! (There have been a court case or two arguing that you can’t have a fraudulent conveyance of exempt property, but those cases have been generally repudiated in California.)

The debtor can’t claim an exemption and her daughter is going to lose the car. All around an unfortunate set of circumstances especially when it is clear that had the debtor waited to transfer the vehicle for a couple of days, it would have been exempt. Then she could give it away to whomever she wanted with no repercussions!

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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