Under the right conditions, you may be able to sell or give away property before filing for bankruptcy. Keep in mind, however, that a bankruptcy trustee may consider certain transfers fraudulent. In that case, trustees may void fraudulent transfers to recover property and liquidate it to satisfy debt.
Understanding which transfers might be appropriate to make before bankruptcy – and those that are not – is essential to protecting your liability.
What Is the Clawback Provision in Bankruptcy?
The Clawback Provision is a bankruptcy trustee’s power to void certain transfers and recover money or property that someone fraudulently transferred before filing for bankruptcy. Trustees can also invoke this power when a bankruptcy filer made preferential transfers certain creditors before others.
What Is Considered a Fraudulent Transfer Before Bankruptcy?
Fraudulent transfers are those that are intended to hide assets or remove them for less than their fair market value.
Typically, fraudulent transfers also meet one or more of these conditions:
- The bankruptcy filer made the transfer within two years before filing for bankruptcy or the period otherwise permitted by law (the lookback period), whichever is greater
- The bankruptcy filer made the transfer with the intent to hinder, delay, or defraud a creditor
- The bankruptcy filer did not receive a fair market value for property transferred during insolvency, became insolvent because of the transfer, or the transfer was intended to cause insolvency
If a transfer meets these conditions, the bankruptcy trustee may void it and recover the property from the recipient.
What Is a Preferential Transfer?
A preferential transfer is a transfer of property from someone to certain creditors, not all of whom are considered equal by the bankruptcy court.
For example, paying back a loan from a family member when one has a lot of credit card debt may be considered a preferential transfer. This is because family members – and business partners, for that matter – are considered “insiders.” Transfers to someone deemed an insider up to a year before filing for bankruptcy may be voided.
More commonly, transfers of property worth $600 or more within 90 days of filing for bankruptcy may be voided if the receiving creditor received more than it would have been entitled to recover in bankruptcy.
Examples of Voidable Transfers
Fraudulent and preferential transfers are each a type of voidable transfer, but what would these kinds of transfers actually look like?
Here are a few examples of potentially voidable transfers:
- Selling a home to an adult child for a fraction of its value
- Gifting a vehicle, artwork, jewelry, or other property of considerable value to a friend
- Writing a check to a family member or friend
- Donating property to a charity
- Giving a religious organization a tithing of 15% or more of your gross annual income
Although it may not be appropriate to make transfers such as these before filing for bankruptcy, paying your bills – especially your mortgage – may not have the same consequences. Consult with a bankruptcy lawyer to learn more about which debts you should try to continue to pay when you become insolvent.
Permitted Pre-Bankruptcy Filing Transfers
Not all pre-bankruptcy transfers within the lookback period are considered fraud or preferential. For example, an asset sold to another party at its fair market value would be permitted. As far as a bankruptcy trustee would be concerned, the value that asset held is preserved in the exchange.
Bankruptcy filers can also take advantage of various exemptions in Chapter 7 bankruptcy – so much so that most cases don’t involve much or even any liquidation. When property transferred before bankruptcy could have been exempted, its transfer probably won’t raise much scrutiny.
Finally, it’s probably fine to transfer assets that don’t have any real market value. You should always, however,consult with a bankruptcy attorney for official guidance. The point here is that if a bankruptcy trustee couldn’t have recovered much or anything from liquidating an asset, they probably won’t attempt to void the transfer.
For more information about this topic or to seek legal guidance for your unique situation, reach out to Financial Relief Law Center today. Contact us now or call (949) 284-0715 to get started!