Section 548 of the Bankruptcy Code endows the bankruptcy court trustee with the power to undo a fraudulent transfer made within two years of the bankruptcy filing. Fraudulent transfers include any transfer made with the intent to hinder, delay, or defraud creditors; or transfers made while the debtor is insolvent which do not involve a fair value exchange. While the lookback period is set at two years by section 548, another section of the Bankruptcy Code (section 544) permits the trustee to apply state law to undo a fraudulent transfer. In many cases the state law lookback period is longer than two years. 

There is generally no issue if you have sold property and received a fair price. However, if you have transferred property in a less than honest fashion, the transfer may be undone. For instance, if you sell your car worth $5,000 to your brother for $500, and then file bankruptcy two months later, the trustee may seize the car from your brother and sell it to pay your creditors. Likewise, deeding jointly owned real estate to a non-filing spouse prior to filing bankruptcy can create a thorny legal dilemma.

 Every individual bankruptcy case must include a Statement of Financial Affairs which asks the debtor to list all property transferred within two years before the bankruptcy filing. It is important to answer this question honestly, and to discuss any recent property transfer with your bankruptcy attorney. 

If you are considering bankruptcy, consult with an experienced bankruptcy attorney and discuss your legal exemptions. In many cases your attorney can legally protect your property without the need to sell or transfer. Your attorney can advise you on the best course of action to protect your property and restructure your financial obligations.

Facts: Debtor was living between her home and her mother’s home who she cares for.  She had a mortgage on her home and her son lived in the house and paid the mortgage. She had approximately $14,000.00 in equity in the home.  Her living arrangement with her mother was not disclosed during the consultation, review, or filing appointments.

At court, the debtor informed the Trustee of these things. This was the first time the attorney heard of this arrangement. She had also claimed the equity as an exemption under U.S.C. 11 section 522(d)(1). The Trustee determined this was an asset case and objected to the exemption on the basis that she could not exempt this equity because it was not her residential real estate since she resided at her mother’s home. All of her mail went to that address, her driver license had that address, and this was also the address she used for voter registration.  The Trustee later filed a Motion to Sell the Real Estate which the Court granted.

This was not the client’s intention.  She wanted to keep her home and eventually move back in permanently with her son.  In an effort to save her home, she moved the Court to convert to Chapter 13 which was granted without objection by the Trustee.  She must now fund a plan to pay money to her unsecured creditors.

The moral of this story is to fully disclose your assets and any arrangements involving those assets to the attorney.  It is a matter of losing assets you think may be protected by exemptions which may not be the case.  Those assets can be liquidated through sale in a Chapter 7 case by the Trustee to pay your unsecured creditors for the debts you owe.  The attorney can best advise you on how to handle your assets.  Remember that what you don’t disclose can hurt you by either losing the asset, forcing you into a Chapter 13, or most harshly losing the asset and not receiving a bankruptcy discharge at all.