Transfer of Assets Prior to Bankruptcy
Bankruptcy allows debtors who are overwhelmed by debt to wipe out their debts and start over. However, debtors cannot engage in dishonest behavior such as incurring debt right before filing for bankruptcy or transferring assets in an attempt to prevent the bankruptcy trustee from liquidating them to pay back the debt.
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Fraud
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Transferring assets right before you file for bankruptcy is considered fraudulent activity, especially if you retain possession of the asset after you transfer it. You cannot transfer assets for the purpose of hiding them from the bankruptcy court or making it appear that you have fewer assets so that your case will have a more favorable outcome. If you make fraudulent transfers, the court can void the transfer.
Exception
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You may transfer assets into property that is already exempt from your bankruptcy. For example, if your home is exempt from bankruptcy, you can transfer assets to the account you use to pay your mortgage. This is not considered fraudulent because you are not giving the asset away to someone else; you are keeping it but transferring it to another property you own.
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Recovery of Assets
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If you transfer your assets within one year of filing for bankruptcy and do not get reasonable compensation in return for the asset, your bankruptcy trustee can recover the asset and use it to pay your creditors. The bankruptcy trustee can also recover your asset if he can prove that you purposely transferred it for the purpose of deceiving the bankruptcy court or keeping it hidden from creditors. The court has the right to dismiss your case altogether if you make fraudulent transfers.
Alternatives
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If you file Chapter 7 bankruptcy, you can keep some of your assets by claiming an exemption. Exemption amounts differ by state, so check with your attorney about the law in your state. If your assets are more than the exemption amount, you can keep them by filing Chapter 13 instead of Chapter 7. Under Chapter 13, you can usually keep your assets as long as you make structured repayments to your creditors. You must make payments within a three- or five-year payment plan to discharge your debts under Chapter 13.
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