What Asset Transfers Must I Report?

Use these links to jump to different sections:

• Lawful Conduct May Be Fraud Under the Bankruptcy Code
• What Risk Will a Bankruptcy Filer Face?
• Planning Is Important When Filing for Bankruptcy

When it comes to reporting asset transfers prior to bankruptcy, filers often think they only need to disclose assets transferred fraudulently. This is not so: The bankruptcy rule against fraudulent transfers is a rule of disclosure—not intent. Bankruptcy filers may have sold a piece of real property or traded in a car (all of which is generally above board), but if it happened within two years of filing, they must disclose it. When filing for bankruptcy, the filer must disclose to the court and appointed trustee whether he or she has sold, traded or otherwise transferred property to anyone within the previous two year period—not including any transfer made in the ordinary course of their business or financial affairs. In New York, state law allows a look-back period of six years for the transfers of assets. The trustee is looking for fraudulent conveyances under the bankruptcy code, which come in two forms:

• Actual fraud, where a filer made such transfer with the intent to hinder, delay or defraud a creditor
• Constructive fraud, where a filer received less than fair market value in exchange, and the exchange occurred when the filer was insolvent (or caused their insolvency)

Lawful Conduct May Be Fraud Under the Bankruptcy Code

For example, take the case of a creditor obtaining a judgment solely against a husband. The husband has a bank account at a financial institution, 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 wife’s name. By transferring title of the bank account from solely the husband’s name to husband and wife, the husband has prevented the 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. If the husband had not changed the title of the account, the husband’s sole creditors could have garnished that account.

What Risk Will a Bankruptcy Filer Face?

The trustee could attempt to avoid the transfer, meaning the trustee will demand the bankruptcy filer or third party return the funds. Otherwise, the filer risks denial or cancellation of their bankruptcy petition. Trustees are paid a nominal fee for each Chapter 7 bankruptcy case they oversee, but discovering a fraudulent transfer will allow the trustee to earn more. The way Chapter 7 bankruptcy trustees earn money is by distributing assets, which allows the trustee to charge a commission on the assets they distribute or sell, or even hire themselves as their own attorney and charge legal fees. Fortunately, these matters often settle. Trustees generally just want money, and they’d rather settle in most instances than sue, because there is certainty of recovery. If a filer is caught in a fraudulent transfer of property, however, there are few options for settlement. Under the assets rules the filer must come up with the money to pay the trustee, or the trustee will recover and liquidate the property.

Planning Is Important When Filing for Bankruptcy

Qualifying bankruptcy filers must make sure they disclose to their attorney all transfers made in the two years before filing. Clients will want to review with their attorney the circumstances of each transaction and the time of the transfer, so they go in with open eyes, knowing whether they are going to face the issue of the trustee trying to avoid a transaction or not. Bankruptcy filers may want to get documentation in advance of their filing to justify or substantiate the transfer. Sometimes these transactions depend on the time of transfer and when to file. An attorney will review, with their client, the date of the transfer, because the transferor may want to wait out the two years to file to avoid having to disclose it. Proper planning before filing should increase a filer’s chances of a successful bankruptcy filing. That is the value in meeting with an experienced New York City area bankruptcy attorney as early in the process as possible to avoid a period of ineligibility. For more information on this area of law, see our bankruptcy overview.