If a bankruptcy looms in your future, you might think that you should give gifts before a bankruptcy court liquidates your assets. However, giving gifts before your bankruptcy starts can become grounds for dismissal of the case, and possibly a felony. As long as you give gifts as a genuine act of kindness and not to hide assets, gifting might be OK.
Bankruptcy courts let debtors give gifts that are "ordinary and usual," such as a birthday gift to a child. The courts usually want to know any and all other gifts you have made in the past year that exceed $200, and $100 for charitable contributions. Gifts do not have to fit the traditional mode of a gift. For example, forgiving a debt a family member owes you is a gift.
Nothing is set in stone in a bankruptcy case. The court's trustee will take into consideration the facts surrounding any gifts. For example, a string of small gifts to the same person over the course of many months may draw the suspicion of the court. If the court finds you guilty of hiding assets, it may throw out your case and possibly pursue litigation in extreme cases of fraud.
In most cases where the court finds a gift in violation of bankruptcy law, it will sue the recipient of the money or asset to pay off your creditors. Thus, you may end up harming the person you give a gift to, especially if it is repayment for a loan. In the case of charitable giving, make sure the donation is a tax-exempt organization and that you have a history of giving to the organization.
Consult a bankruptcy attorney to help you determine when and if you can give gifts before a bankruptcy. Although you do not need to list small gifts, you should tell the court trustee about any gifts in the past year and let the trustee decide whether the gift was an attempt to hide assets. You also can use a "reasonable man" test. If a reasonable third party thinks your gift was an attempt to hide assets, it probably is not a real gift.