The Bankruptcy Code contains many powerful provisions for protecting property and discharging debts. Occasionally a person will try to shuffle assets around to reach a more beneficial outcome during the bankruptcy. Self-help property transfers usually result in serious problems for the debtor and the bankruptcy attorney. As the saying goes, "Pigs get fat, hogs get slaughtered."
A property transfer prior to filing bankruptcy includes cash, personal property, and real estate. In some cases the transfer is entirely innocent, however the Bankruptcy Code does not consider the debtor's intent during the transfer. For instance, a debtor may use a tax refund to repay a loan from a family member. The Bankruptcy Code identifies family members and other creditors who have a special relationship with the debtor as "insider creditors." Payments to insider creditors can be avoided by the trustee if the transfer was made within one year of the bankruptcy filing. The trustee can seek a court order compelling the insider creditor to turn over the cash or property.
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In some circumstances a debtor may want to pay a creditor that is not technically an "insider," but the debtor has favored paying the creditor over others. A common example is using an asset (e.g. saving, tax refund, etc.) to pay down a car loan. In this situation, the debtor chose to pay one creditor instead of other creditors. In other words, the debtor "preferred" the creditor.
A preference payment occurs when there is a transfer of money by a debtor, on account of a pre-existing debt, that is made while the debtor is insolvent, and gives the creditor more than it would receive from the liquidation of the debtor's assets during a Chapter 7. Preference payments are unfair to other creditors, and, if the transaction took place within 90 days, the bankruptcy trustee can compel the recipient to turn over this preference payment to the bankruptcy estate for equal distribution to all creditors.
Another circumstance that causes serious problems is a property transfer just prior to filing bankruptcy. Any transfer of a vehicle title, real estate, or a large value asset just prior to filing bankruptcy will cause the trustee to become highly suspicious of the transfer. The trustee will immediately assume that the transfer was an attempt to hide the asset and protect it from creditors in the bankruptcy.
Take, for example, transferring your paid-for car to your sister just prior to filing bankruptcy. The trustee may ask the bankruptcy court to strip your sister's ownership in the car, and seize and sell the vehicle. Since the car did not belong to you at the time of your bankruptcy filing, you cannot protect it with a personal exemption. In some cases the debtor could have protected the asset with a legal exemption and transferred the vehicle title after filing bankruptcy.
It is often cited that the purpose of the bankruptcy system is to "provide a fresh start for the honest but unfortunate debtor." Being honest during the bankruptcy process is very important and there are serious consequences for the dishonest debtor. Bankruptcy is not a time to try to game the system for a better result. There are many legal and legitimate ways to protect property in bankruptcy.
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