If You’re Taking the Bankruptcy Path, Avoid the Fraudulent Transfer Trail

By |2021-10-12T20:41:39+00:00October 12th, 2021|Bankruptcy|

Like many life-changing events, bankruptcy affects every person differently. Some individuals enter a state of shock or depression. Others feel resentful of the process, including the forms to fill out with required personal and financial information. As a result, even though attorneys and the court give clear instructions, people who file for bankruptcy may not always abide by the rules or list all property transfers on their Statement of Financial Affairs for Individuals Filing for Bankruptcy. Failing to disclose property transfers or devising schemes to hide non-exempt items can result in a lost chance to clear debts and start over. In extreme cases, it may even culminate in penalties, fines and a jail sentence.

Understand Why Property and Transfers Are Scrutinized

When you file a petition for bankruptcy, everything comes to a halt in your financial life. An automatic stay immediately prohibits creditors listed in the petition from attempts to collect their debts. It also creates a bankruptcy estate, placing all your assets that are not exempt into this pot for division among your creditors.

A bankruptcy trustee oversees the estate and makes recommendations to the court about the non-exempt property that becomes part of the estate, as well as items exempt from inclusion under California law. It is the trustee’s job to review bankruptcy forms, recent property transfers and tax returns to make sure all non-exempt property is included in the bankruptcy estate.

The bankruptcy process is designed to give individuals a fresh start while treating creditors as fairly as possible. Persons who file for bankruptcy in California do not have the option of using the property exemptions outlined in the federal bankruptcy code but must choose one of two California exemption schedules. These lists address a place to live, as well as transportation and means for earning a living. For example, an auto mechanic’s professional tools and rolling toolbox are considered exempt property.

Review the Timeframe for Property Transfers

In general, the bankruptcy trustee examines any property transfers that took place during the two years before the bankruptcy petition was filed. For transfers completed during this time, the trustee determines whether a fair market value was paid and if the petitioner was insolvent, or had more debts than assets.

Recognize Fraudulent Property Transfers in Bankruptcy

Fraudulent transfers are considered either actual fraud, meaning property was deliberately withheld from creditors, or constructive fraud, which may lack intent to deceive but still results in transferring non-exempt property.

Individuals have come up with numerous schemes to keep property from creditors when they file for bankruptcy:

  • Leaving the transfer off the bankruptcy forms to avoid discovery
  • Transferring the property to someone else while still using and controlling it
  • Selling items for less than fair market value
  • Gifting property to a close friend or relative
  • Conducting transfers that result in insolvency
  • Devising other plots to hide property

Consider the Consequences

The bankruptcy trustee can overturn fraudulent transfers and restore the property to the bankruptcy estate. This may cause embarrassment and hardship to other parties involved. The trustee might also file a motion to dismiss the bankruptcy, canceling the opportunity for a new financial start. In a case of significant actual fraud, the petitioner could face criminal charges.

You Can’t Outfox a Bankruptcy Trustee and Judge

Your bankruptcy proceedings are not their first rodeo. Although the trustee mainly examines bankruptcy forms and supporting documents, this professional has a keen eye and knows exactly what to investigate.

Be prepared to answer questions about any property transfers made in that two-year timeframe, especially those involving a close friend, family member or business associate. You need to show you received fair market value for the property and relinquished all control of it.

If You’re Unsure About a Property Transfer, Contact a Competent Attorney

Since the federal bankruptcy code is complex, it is important to follow all requirements to avoid having your petition dismissed. California property exemption laws add complications, and you need a caring and experienced attorney to help make the best decisions for your individual circumstances. The Law Offices of Brent D. George takes time to explain details and guide you through every step. Call (805) 494-8400 today for a free consultation.