Why You Should Not Transfer Assets to Your Children During Bankruptcy

For many people, filing for bankruptcy is a way out of financial trouble. It can give you the time and resources you need to pay off your debts, receive an automatic stay on creditors’ attempts to collect, and reduce the possibility of a mortgage foreclosure.

The most common form of bankruptcy available to individuals is Chapter 7. This variety of bankruptcy aims to achieve debt forgiveness through the sale of your assets, allowing your creditors to claim the proceeds.

Some people who file for Chapter 7 may consider transferring certain assets to their children or others as a means of holding onto the things they might not want to lose outright. However, before you attempt such a maneuver, you should know that it will almost certainly result in a negative outcome.

Transferring Assets Can Endanger Your Discharge

On the eve of bankruptcy, some individuals seem to believe that if certain assets are no longer in their own name, they do not have to disclose these assets in their bankruptcy filing. This assumption is incorrect.

In truth, transferring assets to other individuals is the most effective way to put your bankruptcy case in serious peril. Such an action can very easily be interpreted as an attempt to “hinder, delay or defraud” creditors, which is sufficient grounds for denial of your case.

The bankruptcy code is intended to give honest debtors an opportunity for a fresh start. It is designed to ensure that the debtor receives a discharge unless the debtor has been dishonest. According to 11 U.S.C. § 727, proving the following four elements can lead to a denial of discharge:

  1. The property of the debtor was removed, transferred, concealed, or destroyed.
  2. The debtor was responsible for these acts or permitted another party to engage in them.
  3. The act occurred within a year of the bankruptcy filing.
  4. The debtor intended to hinder, delay, or defraud a creditor or a bankruptcy estate officer.

How Is Intent to Defraud Proven?

As debtors are unlikely to admit to an intent to defraud their creditors, a court will usually establish intent by circumstantial evidence. This means that they will look at evidence that will allow them to infer that the debtor had actual intent.

Transferring your assets on the eve of bankruptcy may constitute a fraud on creditors if any of the following is true:

  • The transfer was made for less than fair consideration, even if it was a gift to charity.
  • The transfer was initiated in order to put the asset out of the reach of creditors.
  • The transfer left the individual with less capital than they needed to conduct their business properly.

Consequences of Fraudulent Transfer

Charges of fraudulent transfer are very serious and can lead to having your bankruptcy denied.

The person who has received an asset through a fraudulent transfer will receive either an order requiring that the asset be returned or a money judgment in the amount of the asset’s value. According to the bankruptcy code, the government has the power to recapture transfers that are made within two years of the filing of bankruptcy.

If you are unsure whether a transfer to your kids might potentially be considered fraudulent, it may be safest to assume that it will. Otherwise, you may not only endanger your bankruptcy filing, but you may also put your children at risk of a lawsuit from the government.

Contact an Experienced Raleigh Bankruptcy Attorney

The bankruptcy process can be stressful, especially if it means that you have to get rid of things that you care about in order to make your way out of debt. However, it is many people’s greatest chance of making their way back to financial health. It is important to remember that these opportunities do not come for free. Honoring your side of the bargain is a vital aspect of getting yourself back on the right track.

If you are having trouble understanding what you need to do to have a smooth bankruptcy process, the Raleigh bankruptcy attorneys at Bradford Law Offices, PLLC are here to help. Our legal team has the knowledge, experience, and skill to help you with all aspects of your filing, from start to finish. We recognize that debt does not define a person, and we commit ourselves to doing everything we can to help our clients find their financial feet again.

Call a member of our team today at (919) 758-8879 to schedule a consultation, and we will be happy to talk you through all of your options.