Do Not Transfer Property Before Bankruptcy. Period.
There Are Multiple Reasons NOT to Transfer Property Before Bankruptcy.
Unreasoning fear is the main reason that some people consider whether to transfer property before bankruptcy filing. Almost always because they have heard from someone who is not a Michigan bankruptcy attorney that they ought to do so, or because of something read in an internet forum.
Fear of what? Of losing personal property to creditors or to a Bankruptcy Trustee, primarily. It is not a totally baseless fear, but it can be an unreasoning fear in that it is often considered or, worse, actually done before a person considering filing for bankruptcy actually sits down to speak with an experienced bankruptcy lawyer.
Once that conversation takes place, you will find out if you potentially have assets at risk for liquidation by a Chapter 7 bankruptcy Trusteee in a potential Chapter 7 case—but not until that conversation. And, in the vast majority of cases, that conversation will result in your discovery that you have nothing at all to fear whatsoever, either because your assets are not of sufficient value to be liquidated in a Chapter 7 or because a Chapter 13 bankruptcy may be the best course of action for you. And, in a Chapter 13 bankruptcy, no assets are liquidated at all.
You won’t know that you have no reason to transfer property before bankruptcy until you have that consultation, however.
Don’t Transfer Property Before Bankruptcy Filing—The “Why.”
Transferring assets to evade creditors is a bad idea for a few different reasons.
First, it simply does not work particularly well. Such transfers are fairly obvious to spot on the record and can be unwound by creditors under various circumstances both in and out of bankruptcy. Such transfers may generally (and rightfully) be considered a fraudulent conveyance, which, by definition, is a transfer of property made for the purpose of evading creditors, depending on state statute. The look-back period in Michigan for a potential frauduluent transfer is 6 years, and bankruptcy Trustees may rely on Michigan’s fraduluent transfer statutue to avoid, or undo, a transfer of an asset.
Aside from the general issue of being sure that the person you transfer legal title to a particular property will actually give it back later when there is no legal requirement that they do so, one need look no further than recently resigned and now convicted for Federal bank fraud Michigan Supreme Court Justice Diane Hathaway, who fraudulently transfererred real estate to her daughter in order to finagle a bank’s agreement to alllow a short sale of another piece of real estate.
In bankruptcy, transfers that are avoided are for the benefit of the bankruptcy estate, not the original owner. In bankruptcy, that transferred house in Florida that Hathaway tried to hide from the banks would have been taken by a Chapter 7 Trustee, in addition to the other penalties.
In bankruptcy, all transfers of property within 2 years of filing a bankruptcy petition must be reported on your bankruptcy petition. If the transfer looks or smells like it has been done in order to evade the liquidating power of a Chapter 7 bankruptcy trustee, a Federal criminal charge of Bankruptcy Fraud can be raised, not to mention the possibility of having the transfer declared fraudulent in a court action by the trustee and the property liquidated anyway, or the possibility of having the bankruptcy petition dismissed.
It is important to keep in mind the Bankruptcy Code’s own definition of fradulent transfer: a transfer for less than equivalent value at a time prior to the filing of the bankruptcy petition when the debtor was insolvent. “Insolvency” in this context is defined as assets of lesser value than the value of one’s debt. This is a definition that nearly everyone who files for Chapter 7 bankruptcy meets, particularly if they are in possession of a home that is, as most are as of this writing in the Detroit area, underwater.
That is, almost any transfer or gift can be construed as “fraudulent” under the Bankruptcy Code. Better to play it safe and, minimally, consult with an experienced bankruptcy attorney prior to doing anything—and follow his or her advice, of course.
Transferring property to someone is a good way to get them sued by the Chapter 7 Trustee for the recovery of the property or its basic value. You are not doing any favors for the person you transfer the property when you do so prior to a Chapter 7 bankruptcy.
In short, if there is any possibility that you will bankruptcy within the next two years, do not transfer, quitclaim, assign, or otherwise dispose of assets. For most people, virtually all property can be protected in a bankruptcy. In the smaller percentage of cases where this is not possible, it always better to make a decision to file bankruptcy with the full financial consequences at hand, as they genuinely stand in reality or to consider filing a Chapter 13 bankruptcy, in which assets are not liquidated at all, rather than endangering your discharge or your friends and family-members to whom you might transfer property.
If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.