Your assets can include property and possessions that you have sold or given away before filing bankruptcy.
Your Assets in Bankruptcy
In our last blog posts we got into two special kinds of assets: inheritances and assets you own with someone else. There are special rules and considerations with these unusual assets.
Today’s blog post is about something that may seem even more unusual—assets you used to own but now don’t.
For most purposes the bankruptcy system looks at your financial life now, not in the past. Chapter 7 “straight bankruptcy” picks the date of filing as the point in time to focus on. So does Chapter 13 “adjustment of debts”, while also looking at your financial life during the 3-to-5-year period it lasts.
But bankruptcy can also look backwards at assets you owned before filing the case, in very limited circumstances. Today we look at so-called “fraudulent transfers.” Spoiler alert—your actions don’t necessarily need to be fraudulent to make a “fraudulent transfer.”
The Point of “Fraudulent Transfers”
If you sell or give away some of your assets during the two years before filing bankruptcy, what you sold or gave away can sometimes be brought back into your bankruptcy case.
What’s the point of this ability to reach backwards in time?
One of the key principles of bankruptcy involves the fair distribution of a debtor’s assets to the creditors. In other words, in bankruptcy creditors are entitled to receive payment (usually only partial payment) through the collection and sale a debtor’s assets, to the extent the law allows.
But this principle applies in a practical way only when you have assets that the law allows to be distributed among your creditors. In most consumer Chapter 7 cases, there is no such distribution to creditors. That’s because all of the debtor’s assets are “exempt,” protected for the debtor’s benefit from the creditors. There is no taking of any of your assets for distribution among your creditors.
But the principle of fair treatment of creditors remains. Here’s how it comes into play with “fraudulent transfers.”
The bankruptcy court sometimes has jurisdiction not only over assets that you own when the case is filed, but also over assets you previously sold or gave away under certain circumstances. The purpose of this is very practical. It’s intended to discourage debtors from unfairly disposing of assets before filing bankruptcy. It’s to discourage debtors from, in effect, hiding assets from creditors. And if a debtor does dispose of assets, the purpose of “fraudulent transfer” law is to bring back those assets for the benefit of the creditors. Again, this bringing back of sold or given away assets happens only under certain limited circumstances.
Sorry to keep you in suspense but in our next blog post on Monday morning we’ll tell you about those certain limited circumstances.