Please Do Not Transfer Property

Please Do Not Transfer Property
June 3, 2017 Jacob Simon

Oh, if I had a nickel each time a prospective client has asked me a variation of the following:

“I want to file bankruptcy but I think it would be best to put my house in my [insert relative’s name here] name because I don’t want to disclose my house as an asset.”

As soon as I hear that my muscles tighten and I throw up a little in my mouth.

Why do I throw up, you ask?

Because transferring property in advance of a bankruptcy is not allowed and there are two major repercussions for doing so. First, the transfer of the property can be “undone” by the trustee. That means that the property will be vested in you as if no transfer to the relative had ever been done. Second, your discharge, which is your prized possession, can be denied.

11 U.S.C. §544 says that the chapter 7 trustee can “avoid” (I.e., ruin your day) the prebankruptcy transfer of property. Furthermore, 11 U.S.C. §727 says that a discharge may be denied if “the debtor, with intent to hinder or delay or defraud a creditor or an officer of the estate…has transferred, removed, destroyed, mutilated, or concealed…property of the debtor, within one (1) year before the date of the filing of the petition; or…after the date of the filing of the petition”.

So transferring the property is a bad idea not only because it may lead to a denial of discharge, but also because it may be totally unneccessary in the first place. As a debtor you are allowed to exempt certain assets from the bankruptcy estate, and those exempted assets will not get sold (no matter how much debt you have). It may turn out that you can file bankruptcy AND keep the house!

If you find yourself struggling with the decision of whether or not to transfer (and yes, “gifting” counts) property to a relative before filing bankruptcy please solict the opinion of an experienced bankruptcy attorney.