Bankruptcy and the Holidays: Watch Out for “Fraudulent Transfers”

Gift-giving and gift-getting have a dangerous twist during the holiday season, if you, or your gift-giver, is in financial trouble.

 

If you give away something you own, including giving it as a holiday gift, and then file bankruptcy for up to two years after that, the person you gave that gift to could be required to surrender it to your bankruptcy trustee.

And if instead you receive a gift from a person who, within two years after that, files a bankruptcy, you could be required to surrender that gift to that person’s bankruptcy trustee.

Let’s explain what this rather twist in bankruptcy law is all about.

NOT Modest Gifts

From the beginning let’s be clear that we’re not talking about small gifts—those aren’t worth anybody’s effort to undo.

The Statement of Financial Affairs is one of the forms that everybody filing bankruptcy must complete, and it indicates that the system is not interested in knowing about, much less doing anything about, your small gifts.

Question #7 on this form asks for the following information:

Gifts

List all gifts or charitable contributions made within one year immediately preceding the commencement of this case except ordinary and usual gifts to family members aggregating less than $200 in value per individual family member and charitable contributions aggregating less than $100 per recipient.

However, question 10 in that same Statement of Financial Affairs asks for the following information (without such threshold dollar amounts):

Other transfers

List all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.

This Statement of Financial Affairs must be signed under the penalty of perjury.

The Purpose of “Fraudulent Transfers” in Bankruptcy

One of the most important principles of bankruptcy is that any distribution of debtors’ assets to creditors must be done equally, when there is any such distribution. We emphasize that in most consumer bankruptcy cases, there is no distribution of your assets to creditors because all of your assets are “exempt,” protected from your creditors. But this principle does come into play occasionally in consumer cases.

Sometimes the bankruptcy system has power not only over assets that you own when your case is filed but also over assets that you previously owned but sold or gave away before the filing date. The purpose of this rule is to discourage debtors from disposing of assets before filing bankruptcy, and to require the return of any such transferred assets so that their value can be distributed to the creditors in the bankruptcy case.

Undoing “Fraudulent Transfers”

So the law provides that under certain circumstances if a debtor transfers assets, including in the form of a gift, during the two years before the bankruptcy filing, that transfer can be undone. Then the bankruptcy trustee can sell the assets and distribute the proceeds to the creditors.

“Fraudulent Transfers” Don’t Have to be Fraudulent

There are two kinds: intentionally and constructively “fraudulent transfers.”

The first involves assets sold or given away “with actual intent to hinder, delay, or defraud” the debtor’s creditors. The debtor is intentionally hiding assets from creditors.

The second kind, a constructively “fraudulent transfer “ happens when the debtor filing bankruptcy simply gets ‘less than a reasonably equivalent value in exchange for such transfer or obligation.” There isn’t necessarily any evidence that this was done to intentionally hide anything from creditors, but the debtor didn’t get paid the full value of the transferred asset.

There are four specific situations in which constructively fraudulent transfers can occur. Getting into these is more than we can cover here, but to give you a little better idea about them, one is if the debtor is insolvent when the transfer was made, or the transfer itself made the debtor insolvent. The rationale is that businesses and individuals should usually be allowed to give away their assets, but if doing so while insolvent such transfers are considered having “constructively” defrauded the debtor’s creditors out of the value of the assets transferred.

The Bottom Line for Gifts during the Holidays

As mentioned above, “fraudulent transfers” are not an issue in most consumer bankruptcy cases. And modest gifts and transfers are not the target of this law. But be sure to talk to an experienced bankruptcy attorney BEFORE giving away anything of any meaningful value, or selling it for a price less than within a reasonable range of its actual value. This applies not just to situations in which you are considering selling or giving away assets to prevent them from going to your creditors. It can also apply when that intention is nowhere in your mind.

 

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