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

You must disclose the car transfer on your bankruptcy papers. In many cases, the trustee will be able to get the car back.

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 for bankruptcy, you must disclose that you did so. The bankruptcy trustee can take action to recover the property you transferred if the transfer occurred within two years before you filed your bankruptcy. If you transferred title in a vehicle to a relative to keep it out of bankruptcy so that the trustee couldn’t sell it for the benefit of your creditors, the trustee would likely file a fraudulent transfer lawsuit to recover the car.

(Find out about other things that can go wrong by reading What Is Bankruptcy Fraud?)

You Must Disclose Property Transfers

When you file bankruptcy, one of the many documents you must submit with the filing is the for entitled Your Statement of Financial Affairs for individuals Filing Bankruptcy. The form 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 before filing the bankruptcy, you must disclose it in your paperwork.

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 in Meeting of Creditors: Common Bankruptcy Trustee Questions.)

Penalties for Hiding a Property Transfer

If you intentionally leave information out of your bankruptcy paperwork, or if you’re intentionally untruthful at any time, you can lose your bankruptcy discharge. Worse still, you risk fines and jail time.

(For more on the consequences of failing to disclose a property transfer, see Hiding Assets in Bankruptcy.)

How the Trustee Recovers Fraudulently Transferred Property

One of the trustee's many powers is the ability to legally avoid (cancel) certain transfers, such as the vehicle transfer to your brother, and recover the transferred property. The trustee does so by filing a bankruptcy lawsuit against your brother to recover the car, alleging that the transfer was fraudulent.

Your brother will have to answer the complaint and defend the 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 occurs when the debtor transfers property with the actual intent to hinder, delay or defraud creditors—which would likely be the case if you signed the car over to your brother 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 (your debts exceeded your assets). If you transferred the car within 90 days before filing bankruptcy, the court would presume you were insolvent, and you’d have to prove you were not.
  • You didn’t receive the reasonably equivalent value in return (you gave the car away for nothing).

So, under a constructive fraud theory, 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 more about how the trustee can bring an action to get the property back, see Adversary Proceedings in Bankruptcy.

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