What happens if you transfer property out of your name prior to bankruptcy?

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Question:

I put my car in my brother's name so the bankruptcy trustee couldn't take it. What happens if the trustee finds out?

Answer:

If you give away any property before you file bankruptcy, you must disclose that you did so. The bankruptcy trustee can take action to recover the property you transferred if the transfer occurred with in two years before you filed your bankruptcy. If you transferred title in a vehicle to a relative for the purpose of keeping the vehicle out of the bankruptcy estate and away from the trustee, the trustee will file an action for a fraudulent transfer to recover the vehicle.

You Must Disclose Property Transfers in Your Bankruptcy Papers and at Your Meeting of Creditors

When you file bankruptcy, one of the many documents you must submit with the filing is the Statement of Financial Affairs (SOFA). The SOFA requires you to provide information about your financial history, including past bank accounts, businesses you have owned, property you hold for another and property you have sold or transferred. If you sold or transferred your car to another person prior to filing the bankruptcy, you must disclose it on your SOFA.

Additionally, every person who files bankruptcy must attend a meeting of creditors, where the trustee will ask questions about your property and finances. The trustee will ask you if you have transferred or sold any property within the past few years. (Learn more about the meeting of creditors.)

What Happens If You Omit Information or Lie?

If you intentionally omit the information from your SOFA or if you are untruthful at the meeting of creditors, you can lose your bankruptcy discharge. Worse still, you sign your bankruptcy paperwork and testify at the meeting of creditors under penalty of perjury, and you risk fines and criminal action if you lie. (For more on the consequences if you hide property or lie, see Hiding Assets & Property in Bankruptcy.)

The Trustee Can Recover Certain Pre-Bankruptcy Transfers

One of the trustee's many powers is the ability to avoid (cancel) certain transfers and recover the transferred property. This means the trustee can legally undo the transfer and get the car back from your brother. To do so, the trustee will file a lawsuit within your bankruptcy case against your brother to recover the car, alleging that the transfer was fraudulent. Your brother will have to answer the complaint and engage in a lawsuit; if he fails to answer, the court will enter a default, and the trustee will obtain a judgment.

There are two grounds for a fraudulent transfer action: actual fraud and constructive fraud.

Actual fraud. Actual fraud is found where the debtor transfers property with actual intent to hinder, delay or defraud creditors -- which is the case if you transferred your car into your brother's name in order to hide it from the trustee.

Constructive fraud. Even if the trustee cannot prove that you had actual intent to defraud, the trustee can still sue under a theory of constructive fraud if:

  • You were insolvent when you made the transfer. This means your debts exceeded your assets. If you transferred the car within 90 days before filing bankruptcy, the court will presume you were insolvent and you will have to prove you were not.
  • You did not receive reasonably equivalent value in return (you gave the car away for nothing).

This means that even if you weren't trying to hide assets, your brother still might have to give the car back.

Your brother's options in either case (actual or constructive fraud) are to (1) give the car back, (2) try to reach a settlement with the trustee whereby he keeps the car and pays the trustee some money, or (3) fight the trustee lawsuit.

To learn about how the trustee can bring an action to get property back into the estate, see Adversary Proceedings in Bankruptcy.

by: , Contributing Author

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