Generally a debtor cannot transfer property to others to keep from losing it in bankruptcy…unless the debtor has transferred the property for fair value or in exchange for other property of the same value or, in Pennsylvania, the debtor has transferred the property more than 4 years prior to a bankruptcy filing.
The Bankruptcy Code allows a bankruptcy trustee to “avoid” any transfer of property by a debtor if: (a) the debtor intended to hinder, delay or defraud creditors, or (b) the debtor receives less than a reasonably equivalent value (in money or other property) in exchange for the property, (c) the debtor was insolvent at the time of the transfer or was made so as a result of the transfer, and (d) the transfer occurred within 2 years of the date of the bankruptcy filing. Pennsylvania law extends the “lookback” period to 4 years.
“Avoid” means that the trustee can retrieve or repossess the transferred property or obtain a judgment (against the debtor or the person who receives the property) in an amount equal to the value of the transferred property as of the date of the transfer.
What is worse is that once the trustee retrieves the transferred property, the debtor will not be entitled to exempt any portion of the property because, technically, the debtor is not the owner of the property on the date of his or her bankruptcy filing (a prerequisite under the Bankruptcy Code to being allowed to take an exemption).
Nevertheless, there are several legal, ethical and court-approved ways to transfer property to keep from losing property in a bankruptcy case.
If you wish to discuss the content of this post, please feel free call me at (570) 823-9400 or write to me at davidharrisesq@epix.net.
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Great advice David. Many debtors are shocked to discover this and are disappointed when they now have to wait a few months or years before their case can be filed.
What’s even more frustrating is when they discover that the transferred asset would have been exempt in their possession but cannot be exempted in the hands of others.
I saw this last year. Parents/debtors transferred their $40,000 mobile home to their children for $1.00 and then filed a bankruptcy case 2.5 years later. As Pennsylvania has a 4-year statute of limitations, the bankruptcy trustee asked the children to fork over $40,000 or the mobile home. Had the parents never transferred the property, the mobile home would have been fully protected by an exemption afforded by the Bankruptcy Code.