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.

By , Attorney

Question

I put my car in my brother's name so the bankruptcy trustee couldn't take it. What happens if the Chapter 7 trustee finds out about the property transfer?

Answer

If you give away any property before you file for bankruptcy, you must disclose it in your bankruptcy paperwork. The bankruptcy trustee can take action to recover the property you transferred if the transfer occurred within two years before you filed your bankruptcy.

Here's what would happen if you transferred the vehicle title to a relative so the Chapter 7 bankruptcy trustee couldn't sell it for your creditors' benefit:

  • The trustee would likely request the car's return or payment of the car's value.
  • If a settlement couldn't be reached, the trustee would file a fraudulent transfer lawsuit to recover the car.

Find out about other things that can go wrong in What Is Bankruptcy Fraud?

You Must Disclose Chapter 7 Property Transfers

When you file for bankruptcy, one of the many documents you must submit is the form entitled Your Statement of Financial Affairs for individuals Filing Bankruptcy. Bankruptcy lawyers often refer to it as the "SOFA" form.

You'll provide information about past financial dealings on the SOFA form, including:

  • your financial history, including past bank accounts
  • property a lender has repossessed or foreclosed on
  • lawsuits you're involved in
  • businesses you own
  • gifts made to friends, family, and church
  • property you're keeping for someone else, and
  • property you've sold or transferred.

If you sold or transferred your car to another person during the two years before filing for Chapter 7 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 about common bankruptcy trustee questions.

Penalties for Hiding a Property Transfer

If you intentionally leave information out of your bankruptcy paperwork or are untruthful at any time, you can lose your bankruptcy "discharge," the order that erases your obligation to pay debts. Worse still, you risk fines and jail time.

Learn more about the consequences of failing to disclose a property transfer and hiding assets in bankruptcy.

Chapter 7 Transfer Property Rules: The Trustee Recovers Fraudulently Transferred Property

Filers in Chapter 7 who transfer property before bankruptcy should know the Chapter 7 trustee has many powers. One of the trustee's powers is legally "avoiding" or canceling certain transfers, such as the vehicle transfer to your brother. The avoidance allows the trustee to recover the transferred property.

The trustee starts the process by filing a bankruptcy lawsuit against your brother to retrieve the car, alleging that the transfer was fraudulent. Your brother will have to respond to the complaint and defend the lawsuit. If he fails to respond by filing an answer or an objection to the suit, the court will enter a default, and the trustee will obtain a judgment.

Proving Fraud in Chapter 7 Transferred Property Case

The Chapter 7 trustee will have two ways to win a fraudulent transfer action. The trustee can prove either actual or constructive fraud.

Actual fraud. Actual fraud occurs when the debtor transfers property with the true 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 can't prove you intended to defraud your creditors, the trustee can still sue under a theory of constructive fraud if:

  • You were "insolvent" because your debts exceeded your assets when transferring the car.
  • You didn't receive a reasonable equivalent value because you gave the car away for nothing.

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 actual or constructive fraud are to:

  • give the car back
  • settle with the trustee to pay to keep the vehicle, or
  • fight the trustee lawsuit known as an "adversary proceeding."

Many bankruptcy filers don't want the person in possession of the property to be burdened and take it upon themselves to negotiate with the trustee. Learn more about how the trustee can bring an action to get the property back using adversary proceedings in bankruptcy.

Consult With a Bankruptcy Lawyer

You don't want to run into a problem when filing for bankruptcy. Talking with a bankruptcy attorney can help if you're dealing with a complicated issue. A bankruptcy lawyer will help you achieve your goal within the bankruptcy laws or, when not possible, explain appropriate alternatives to bankruptcy.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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