A debtor who sells or transfers property shortly before filing bankruptcy could be putting his or her bankruptcy and property at risk. Depending on the circumstances, a trustee may be allowed to recover the transferred property as part of the bankruptcy estate.
There are a few factors that determine whether a person may be allowed to perform a pre-bankruptcy transfer of property. Those factors include:
1. Whether the property was exempt or nonexempt;
2. Whether the transfer was made;
3. Whether the debtor received fair market value for the property;
4. How the debtor spent the proceeds; and,
5. Why the transfer was made.
A person is allowed to transfer exempt property before declaring bankruptcy. However, selling or transferring nonexempt property can disrupt the bankruptcy process.
Exempt property is property that cannot be taken by creditors to satisfy a judgment. Exempt property often includes a person’s primary residence (homestead), some equity in a car ($1,000), some household goods (either $1,000 or $4,000), and the cash value of life insurance policies, annuities, and retirement accounts. Nonexempt property is property that is not exempt by state law.
Exempt property can be transferred as long as the person receives the fair market value for the property. We recommend a debtor keep his or her exempt property during the bankruptcy, as the trustee cannot take the property regardless.
Selling nonexempt property when a debtor knows, or has reason to know, he or she may file bankruptcy is discouraged. A court can and will investigate a pre-bankruptcy sale of property. The time period a court can look back depends on the type of property and the reason for the investigation. If the debtor did not receive fair market value for the property, the trustee may file a lawsuit to recover the property. Trustees can review these types of transfers made within one year prior to filing bankruptcy if it was an insider transaction. An insider transaction is one made to a family member or close friend.
If the person purchased new exempt property, increased the value of the existing property, or favored a particular creditor over another, it is possible the trustee will investigate these transfers as well. A trustee can file a lawsuit to recover a particular payment or property in order to allow all creditors to be paid equally. This applies to payments made to creditors within 90 days prior to filing bankruptcy. Debtors should be particularly wary of paying back creditors who are family members or close personal friends, as a trustee can seize this money.
A court will try to infer a debtor’s intent from the circumstances surrounding the transfer. Courts will take a number of factors into consideration such as how much the debtor received for the transfer, and whether the debtor retains control of the property after the transfer. The court will also consider numerous other factors surrounding the transfer for signs of fraud.
For more information on transferring property before and during bankruptcy, contact the Law Office of David M. Goldman, PLLC today at 904-685-1200.