Why You Shouldn't Transfer Property Before Filing Bankruptcy

A person should not transfer property before filing bankruptcy because the Bankruptcy Code allows the bankruptcy trustee to avoid fraudulent transfers of property that occur within one year before a bankruptcy filing.   This means that the conveyance could be set aside and declared void if it was made with the intent to conceal the property from the reach of creditors. 

What is a Fraudulent Transfer?

A fraudulent transfer is any transfer of property meant to conceal property from creditors and the bankruptcy court.  Fraudulent transfers are divided into two categories: 

• Those which are actually fraudulent; and
• Those which are constructively fraudulent. 

What is Actual Fraud? – A transfer is actually fraudulent if it was made with the intent to hinder, delay, or defraud a creditor or other entity to which the debtor owes a debt.  The debtor’s intent is at the heart of the determination of whether a conveyance was actually fraudulent.  Whether the debtor was insolvent or had a malicious intent is irrelevant. 

What is Constructive Fraud? – The intent of the debtor has no bearing on whether a transfer is constructively fraudulent.  A transfer is constructively fraudulent if: 

• The debtor received less than reasonably equivalent value for the property;
• The debtor was insolvent on the date of the transfer or become insolvent as a result of the transfer;
• The debtor was engaged or about to be engaged in a business or transaction that his remaining property could not adequately capitalize; or
• The debtor intended to incur or believed he would incur debts that he had no reasonable ability or expectation of paying. 

In determining whether a transaction was constructively fraudulent, the bankruptcy court examines whether the consideration received for the property was reasonably equivalent to its value.  The following factors are key in making this determination: 

• Whether the consideration received was equal to the value of the transferred property;
• The fair market value of the property;
• Whether the transfer was an arm’s length transaction; and
• Whether the transferee was a bona fide purchaser. 

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If a pre-bankruptcy transfer is set aside as a fraudulent transfer, the transferee may be required to transfer the property to the bankruptcy trustee or to pay him the fair market value of the property.  This can have a devastating impact on both the transferee and the debtor.  Therefore, it’s imperative to disclose to your bankruptcy attorney all transfers of property made during the one year period before you file bankruptcy.