A common question that we often get asked is whether someone can give away or transfer over property in order to avoid their creditors if they are going to file for bankruptcy. The very short and quick answer is no. While it may sound like a good idea on the surface, federal bankruptcy law and most states have enacted laws which strictly prohibit a debtor (someone who is filing for bankruptcy) from doing this.
We always advise our clients to, using a golf analogy, play the ball as it lies. That means, in essence, to not make any transfers or changes to any of your property in contemplation of a bankruptcy filing. Of course, if there will never be a bankruptcy filing, then transfers or changes to property are acceptable. The context in which we see this issue, however, is when a client comes to us and has property in their name that is not exempt for bankruptcy purposes and they want to save it by giving it to a family member or friend. The answer to whether someone should do this is an absolute no.
Exemption planning can be very tricky and problematic in this context. The federal bankruptcy laws are very generous to people who are honest about their dealings with their property and their debts. As a result, when someone comes to us, no matter what their situation is, we essentially tell them to freeze everything, meaning do not make any changes to property, either giving any of their property away or adding to their property. This can be a big problem under the federal bankruptcy laws. In light of the fact that the bankruptcy laws require full and complete disclosure of the entire financial picture of the person that is filing, absolute honesty is an absolute requirement. It is a must when someone is filing for bankruptcy.
Failure to disclose transfers of property can result in denial of a bankruptcy discharge and, at its worst, criminal charges. Full disclosure of transfers prior to filing for bankruptcy can obviously result in the bankruptcy court and trustee voiding out the transfer and seizing back the property. The bankruptcy laws fully address this and most states have also enacted fraudulent conveyance statutes to address this exact situation.
Our advice is to tread very cautiously when and if someone is thinking about transferring property prior to a bankruptcy filing. Before you do anything like this, it is best to get a full and complete understanding of your situation. Therefore, we advise sitting down with one of our licensed attorneys in a confidential setting to discuss all of your options. Please feel free to contact our office location nearest to you to review your debt situation in a private and confidential consultation.