05 Nov Giving Property Away Before Bankruptcy
- “I’ll just give my car to my niece/son/brother/friend…” before I file forbankruptcy.
I can’t tell you how many times I’ve heard that or something similar from a client about to file bankruptcy.
Sometimes the client has the best of intentions: she’s about to graduate college and I always promised her a car for a graduation present. Or, the client is just re-paying an old debt: he lent me money a couple of years ago and I want to re-pay it.
If the property has not been transferred, at least I can counsel my clients not to do so at the present time. And if the gift or repayment has already occurred it may be that the property can be returned before the bankruptcy filing.
If the transfer of property cannot be undone or the client forgets to mention it until after the bankruptcy is filed, there can be grave consequences.
In the first place, a gift of property can be considered a fraudulent conveyance. The bankruptcy code allows the trustee to recover any such property given away within the two years prior to filing a bankruptcy. State law can increase that period. (Here in California, there is a four year period.)
And if a debt is repaid, that might be considered a preferential payment. The trustee can then recover the value of the property so that it can be divided evenly among all of the creditors of the client.
Either way, the recipient will probably lose the property or have to pay for it. This is true even if the property would have been exempt had it been in the client’s possession when the case was filed. Transferring it, however, will void the exemption (you can’t claim it since it isn’t yours).
It’s always best to check with competent counsel before making any transfers of property or large payments when you are considering bankruptcy.
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