Transferring Property Before Filing Bankruptcy is Usually a Bad Idea
One of the many myths about bankruptcy is that a bankruptcy filing will cause one to lose all of his or her property. As a result, many individuals in Kentucky and Indiana contemplating filing bankruptcy engage in the dubious strategy of transferring some or all of their property out of their name. This is almost always a mistake and will usually make their situation worse. This blog post will explain why.
First of all, the idea that transferring assets out of one’s name before filing bankruptcy is a good idea is based on the erroneous assumption that one is not allowed to own anything when he files bankruptcy. After all, Chapter 7 bankruptcy is called “Liquidation.” Therefore, it follows that if I file bankruptcy then all of my property will be liquidated. This is not the case. The laws of every state, including Kentucky and Indiana, provide debtors with exemptions that allow them to keep a certain amount of property when they file bankruptcy. These exemptions are normally enough to cover one’s basic necessities, such as household goods, clothing, jewelry and personal effects, as well as an automobile, up to a certain dollar amount. Exemption laws in Kentucky and Indiana also allow one to protect a certain amount of equity in one’s personal residence. So in most instances there is no reason to transfer assets out of one’s name because the assets are exempt and therefore not subject to liquidation.
The first problem with transferring assets out of one’s name before bankruptcy is that if such action is done shortly before filing bankruptcy and reasonably equivalent value is not received in exchange for that transfer, then the transfer will be considered a “fraudulent transfer“. If this transfer occurred within two years of the filing of the bankruptcy, then the bankruptcy trustee can set aside the transfer and sell the property for the benefit of your creditors. So the strategy of selling your house or your car or other property to your brother-in-law for $1.00 right before you file bankruptcy will simply not work. The transfer will not be legally valid and the trustee will be able to recover the property and sell it.
The other problem with transferring property out of one’s name before bankruptcy is that by doing so one loses his exemption. The bankruptcy code provides that any property that is voluntarily transferred before bankruptcy is no longer exempt. So when the trustee recovers that fraudulent transfer and brings the property back into the bankruptcy estate, no exemption will be available to protect that property. So by engaging in this conduct, you will have actually made your situation worse. For the property you transferred may have already been exempt and had you not transferred it, you may have been able to retain it.
The best strategy is to seek competent legal advice before engaging in any pre-bankruptcy planning.