The majority of people who consider filing for bankruptcy protection immediately start thinking about their assets and the possibility of losing them. The desire to protect your assets from creditors is a natural one and is usually the primary reason someone considers filing bankruptcy. Often times, this desire to protect assets leads people to transfer or sell an asset before filing their bankruptcy case. But potential debtors should know that certain asset transfers are outright illegal under the Bankruptcy Code. The Trustee can void (i.e. undo) these types of asset transfers and take back the transferred property for the benefit of the unsecured creditors. In plain terms, this means that the Trustee will file a lawsuit against whoever received the payment or purchased the asset to recover the property or the cash value of the property. This right to “clawback” property of the estate often puts debtors in very awkward situations, especially when they transferred the asset to a family member or friend who is now being sued by a United States Trustee. The two types of illegal asset transfers are “Preferential Transfers” and “Fraudulent Transfers”. Let’s take a look at the elements of both.
Preferential Transfers are governed by 11 U.S.C. § 547 and there are two basic types. The first type of preferential transfer can be referred to as 90 day transfers. These asset transfers include any payments or transfers of property to a creditor that: (1) occurred within 90 days of filing the bankruptcy case, (2) involved money or property worth more than $600 in aggregate to any one creditor, and (3) were made while the debtor was insolvent (i.e. at a time when the amount of the debts is greater than the value of all the assets). It is important to note that the Trustee usually does not have to prove the debtor’s insolvency with these types of transfers because bankruptcy law automatically presumes that a debtor is insolvent during the 90 days prior to the filing of their case.
The second type of preferential transfer can be referred to as Insider Transfers. Insider transfers include any payments or transfers of assets to people such as family members, friends, or business partners that involved money or property worth more than $600 in aggregate to any one creditor and occurred while the debtor was insolvent. However, instead of only looking back 90 days from the filing date, the Trustee can undo these types of transfers if they were made anytime within 1 year of filing the bankruptcy case.
Fraudulent Transfers are governed by 11 U.S.C. § 548 and include any transfer made within 2 years of the filing date if the Debtor: (1) made the transfer with the actual intent to hinder, delay, or defraud the creditors or (2) received less than the fair market value of the property and was insolvent at the time of the transfer.
Any potential debtor should be aware of these types of illegal transfers and consult a bankruptcy attorney about the potential impacts on their case. Debtors who have made a transfer that might be considered preferential or fraudulent may be able to avoid a clawback situation by simply delaying the filing of their bankruptcy case. However, all debtors should know that hiding assets or intentionally committing bankruptcy fraud can result in dire consequences such as loss of property, inability to receive a discharge, and even criminal prosecution. The bottom line is that if you want to transfer or sell an asset before filing bankruptcy you should talk to your bankruptcy attorney to determine if you can do so without negative consequences.
By: Joshua B. Dawes, Attorney at The Law Offices of Jason A. Burgess, LLC
If you have questions about this or anything else please give us a call at 904-354-5065 or email us at jason@jasonAburgess.com