Can I Transfer Assets Prior to Bankruptcy?

Use these links to jump to different sections:

• Lawful Conduct May Be Bankruptcy Fraud
• What Risk Will I Face?
• Can I Settle These Matters?
• Planning To Avoid the Red Flags

When filing for bankruptcy, a debtor must disclose to the court and appointed trustee whether the debtor has sold, traded or otherwise transferred property to anyone within the previous two years—excluding any transfers made in the ordinary course of their business or financial affairs. The trustee is looking for fraudulent conveyances under the bankruptcy code, which come in two forms:

1. Actual fraud, where a debtor made such transfer with the intent to hinder, delay or defraud a creditor
2. Constructive fraud, where the debtor received less than reasonably equivalent value in exchange, and it occurred when the debtor was insolvent (or caused their insolvency)

In his 25 years of experience practicing bankruptcy law in Maryland, Alan Eisler says fraudulent conveyances are “not uncommon, but it’s something that the attorney needs to investigate with the client. I always remind my clients it’s a rule of disclosure, not intent. They can sell a piece of real estate or trade in a car—all of that is above-board. If it happens within two years, they must disclose it, but a lot of people mistakenly think, ‘Well, I only need to disclose things I’ve transferred fraudulently.’”

Lawful Conduct May Be Bankruptcy Fraud

Eisler gives the example of a creditor obtaining a judgment solely against a husband. The husband has a bank account in his name only and the creditor wants to garnish the husband’s account. To avoid the creditor, the husband changes title of his sole bank account to a joint account in his and his spouse’s name. “By transferring title of the bank account from solely the husband’s name to husband and wife, the husband has prevented the judgment creditor from attaching the judgment to the account because money held in a bank account of husband and wife is protected from the creditors of solely one spouse,” Eisler says. “If he hadn’t changed the title to the account, the husband’s sole creditors could have garnished that account.”

What Risk Will I Face?

The bankruptcy trustee could attempt to avoid the transfer. Avoiding the transfer means the trustee will demand the debtor or third party return the funds—otherwise the debtor risks denial of their bankruptcy petition. Although Maryland debtors must disclose the previous two years of transfers, Eisler says, “the trustee has the power under Maryland state law to set aside fraudulent transfers that occur within three years of the bankruptcy filing.”

Can I Settle These Matters?

Eisler says trustees are paid a nominal fee for each Chapter 7 bankruptcy case. But, discovering a fraudulent transfer will allow the trustee to earn more than just their nominal fee. “The way Chapter 7 trustees earn money is by distributing assets, because they can charge commissions on the assets they distribute or sell. They also can hire themselves as their own attorney and charge legal fees.” That said, Eisler says often these matters settle. “They’d rather settle in most instances than sue because there is certainty of recovery,” he says, adding that, if a debtor is caught in a fraudulent transfer, there are few options for settlement. “The debtor will come up with the money to pay the trustee or the trustee will recover property and liquidate the property.”

Planning To Avoid the Red Flags

“Make sure you disclose to your attorney all transfers that you’ve made in the two years before filing,” Eisler says. “Clients will want to review with their attorney the circumstances of each transfer so you go in with open eyes knowing whether you are going to face the issue of the trustee trying to avoid a transaction. You may want to get documentation in advance of your filing or meeting of creditors to justify or substantiate the transfer.” When a transfer did happen, Eisler says he may advise waiting to file so you don’t need to disclose it. “Sometimes these transfers become a timing issue on when to file.” Planning advice that likely increases a client’s chances of a successful bankruptcy filing, which is the value in meeting with an experienced Maryland bankruptcy attorney in advance. For more information on this area of law, see our bankruptcy overview or contact a bankruptcy lawyer or law firm. Some offer a free consultation.