Recently on our bankruptcy forum a user asked, “I have a car that I would like to give to a relative. I am also planning on filing for Chapter 7 bankruptcy. I was wondering what I need to consider prior to the property transfer.”
Property transfer for nonexempt property
If you are considering filing Chapter 7 bankruptcy and you are planning to transfer property it’s important to have a thorough understanding of bankruptcy laws and whether or not the transfer is allowed. Illegally transferring property may result in a denial of the bankruptcy discharge, or the bankruptcy trustee may be allowed to recover the transmitted property.
Steps to take prior to a property transfer or sale:
- Determine whether the property is exempt or nonexempt.
The first consideration prior to a property transfer is whether or not the property is nonexempt or exempt. In Chapter 7 bankruptcy nonexempt property includes assets or property which the trustee has the legal right to take and sell to generate income to repay creditors. Exempt property, which can include your primary residence or certain household goods, is property which is considered exempt or protected from liquidation.
While it is generally fine to transfer or sell exempt property (assuming you receive fair market value for the property), selling nonexempt property can be a bit more complicated. For example, the bankruptcy court may take issue with the sale of nonexempt property, especially if they believe the property transfer or sale was done to defraud, delay or hinder creditors.
- When was the sale or property transfer completed?
Bankruptcy laws for a property transfer can be complicated and can vary based on the type of property sold or transferred, why the transfer was made, and the reason the transfer is under investigation. Talk to a bankruptcy lawyer if you have questions about how far back the bankruptcy court can investigate a sale or transfer.
- How much did you receive for the property transfer or sale?
Another issue the bankruptcy court will investigate is whether or not you received fair market value for the transferred property. If you did not receive market value the trustee may have the legal right to reclaim the property by filing a lawsuit. State laws will determine how far back the trustee can look when determining whether an illegal transfer was made.
- What did you do with the money you made from the property transfer or sale?
Finally, when the court is reviewing the sale or transfer of property made prior to the bankruptcy filing they will review what you did with the earnings. For example, if you transferred a car and used the proceeds to buy exempt property, to repay one creditor instead of others, or to purchase luxury goods, the court may take action.
Specifically, creditors favored or paid over other creditors within 90 days of the bankruptcy filing may have to repay the trustee the funds so the proceeds can be used to repay all of the creditors equally. If you repaid a family member within one year of a bankruptcy filing the bankruptcy court may recover the payments through a lawsuit and may distribute those funds more equitably.
Transferring or selling property, especially nonexempt property, too close to the bankruptcy filing should not be done without talking to a bankruptcy lawyer.
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