Everyone wants to protect and save their personal and real property from loss during a bankruptcy. Filing a Chapter 13 bankruptcy petition typically does not prohibit someone from selling or buying assets prior to the action since liquidation is not a required component. A Chapter 7 bankruptcy, however, requires that the petitioner’s assets be liquidated (sold or otherwise turned into cash) to pay creditors as much as possible. The temptation to “sell” or transfer assets to others is strong. Avoid the temptation.
Potential Penalties for Unlawfully Transferring Assets Prior to Bankruptcy
Both federal and state laws permit the court to void and/or reverse asset sales shortly before filing a bankruptcy petition. Should the court determine that assets were transferred to circumvent or avoid the bankruptcy process, criminal penalties may even apply.
Another unwelcome penalty takes the form of a court dismissal of the bankruptcy petition. This can be the most damaging outcome of all, as all the protection of filing bankruptcy (no collection activity, ability to discharge all debts) disappears and one’s financial difficulties will resume and, possibly, multiply.
Understand the Quirks of Bankruptcy Law
Bankruptcy is a federal law. But, unlike most federal laws, individual states have the ability to enact regulations that supersede some of the federal provisions. Therefore, it is imperative that those contemplating bankruptcy learn about applicable regulations that apply in their state as well as the federal rules.
The stipulations regarding transfer of assets prior to bankruptcy may differ to the benefit or detriment of prospective petitioners. In most cases, the court may want to examine any significant asset transfers that occurred within one year of the bankruptcy filing. Both federal and state laws contain “look back” provisions, allowing them to examine transactions that occurred before filing bankruptcy that may have changed the petitioner’s situation.
Legally Protect Assets Before and After Bankruptcy
Instead of risking the bankruptcy, analyze the “exemptions” allowed by the federal and particular state law. Exemptions define the amount and type of personal and real property that petitioners may protect by excluding them from the bankruptcy.
Personal property may include clothing, furniture, electronics, jewelry, and other items. Real estate typically includes one’s primary residence or a percentage of its value that can be excluded. Autos, up to some limits, also are often allowed to be exemptions.
Exemptions are not “free passes” and do not allow one to keep all of their important assets. For example, if the petitioner owns five houses, in many cases, only their principal residence will be protected. Similarly, owning multiple vehicles may result in only one or two autos qualifying for exemption.
Always learn about both federal and state exemption rules. Consult a bankruptcy lawyer to ensure that all exemptions are used properly. This is safer than attempting to move assets outside of the bankruptcy by non-arms length transfers prior to filing.