Do Not Transfer Your Property before Your Bankruptcy

I wanted to write an article on this topic because it is a common idea among potential clients when at our initial meeting.

Usually, it starts with a question, "Should I transfer __________ to my relative for free so that I don't lose it in the bankruptcy?" My answer to this is always no. Here is why:

First, you lose your right to exempt (and keep) property that is no longer owned by you. Exemptions are provided under California Law for specific categories of property that you get to keep even when you file bankruptcy to allow you to land on your feet and have something after coming out of bankruptcy. However, you can only exempt property that you own. Many times when someone asks me this question, they are asking it about property that can be fully exempted and protected in a bankruptcy proceeding. If it is the house you reside in, you can exempt between $75,000-$175,000 in equity. If it is a vehicle, you can regularly exempt the entire value of the vehicle. For example, if you aren't claiming a homestead exemption, you may be able to exempt a vehicle worth over $25,000 if you don't have much other property to protect.

Second, you jeopardize your right to receive a discharge in bankruptcy. The discharge is a legal excuse from having to repay debts. It is the main reason to file a bankruptcy case. Title 11 U.S.C. Section 727 provides in part that:

"The court shall grant the debtor a discharge, unless—

...

(2)the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—

(A) property of the debtor, within one year before the date of the filing of the petition"

When you transfer your property to put it beyond the reach of your bankruptcy, this hinders or delays the trustee (an officer of the estate) from selling it to pay your creditors. Transfers made within a year of the bankruptcy have to be disclosed in the bankruptcy. So each transfer will be scrutinized under this standard. If there is no transfer, there is no scrutiny.

Third, your relative gets sued by the Trustee. If the asset is of significant value, the Trustee will pursue your relative on a fraudulent transfer theory. The relative will need to return the property or if the relative no longer has the property may need to pay the equivalent of its value. You do not get to exempt property that the Trustee recovers under this method.

What if you already transferred the property before you saw an attorney or worse another attorney told you the transfer was ok and you did it? You can hopefully get the property transferred back to you so you own it prior to the bankruptcy filing. In most cases, if a creditor was not prejudiced by the temporary transfer, you should be able to avoid loss of a discharge in the subsequent filing.