Selling or giving away an asset before filing bankruptcy could result in that asset being returned as a “fraudulent transfer.”
What’s a Fraudulent Transfer?
Our last blog post explained why the bankruptcy system may be interested in what you sold or gave away before filing bankruptcy. It’s about you not being allowed to avoid paying creditors by hiding assets. So, assets you sold or gave away within 2 years before filing bankruptcy might be subject to recovery by your trustee for the benefit of your creditors.
We ended the last blog post by emphasizing this only happens in certain circumstances. Today we get into those circumstances.
Selling and Giving Away Assets Is Often Fine
Let’s be practical and sensible about “fraudulent transfers.”
In many circumstances it’s not a problem to sell some stuff you own during the period before filing bankruptcy. It’s perfectly fine to sell anything you own for sensible purposes. For example, it’s no problem to sell something you own to raise money to pay creditors or living expenses.
You just need to get paid a reasonable amount in the transaction. You must be paid “a reasonable equivalent value in exchange” for what you sold. (Section 548(a)(1)(B)(i) of the Bankruptcy Code) That means garage sale prices in a garage sale, reasonably close to blue book value for a vehicle, etc.
It’s even okay to give away assets, although that’s a bit trickier. You can give away stuff that effectively has no “reasonable equivalent value in exchange.” That means that the only practical way to get rid of it is to give it away.
If you’re giving away to charity, you have more flexibility. As long as you are giving to “a qualified religious or charitable entity or organization” you can give assets worth up to 15% of your gross income that year. (Section 548(a)(2)(A)) You can even give more “if the transfer was consistent with the practices of the debtor in making charitable contributions.” (Section 548(a)(2)(B))
So when does selling and giving away assets turn into a fraudulent transfer?
Actually Fraudulent “Fraudulent Transfers”
You can’t sell or give away assets “with actual intent to hinder, delay, or defraud” your creditors. (Section 548(a)(1)(A)) You can’t purposely hide your assets from your creditors by getting rid of the assets. Call this intentionally fraudulent transfer. These are relatively rare, in part because such “actual intent” is hard to prove.
NOT Actually Fraudulent “Fraudulent Transfers”
Even without any such fraudulent intent, a constructive “fraudulent transfer” can happen. It usually takes two conditions:
- You get “less than a reasonably equivalent value in exchange for such transfer or obligation.” There isn’t necessarily any evidence that your sale or gift was done to hide the asset from your creditors. But you didn’t get paid what the asset being transferred was worth. (Section 548(a)(1)(B)(i) of the Bankruptcy Code.)
- You are insolvent at the time of this transfer. Or the transfer makes you insolvent. (Section 548(a)(1)(B)(ii)(I)) “Insolvent” means the value of all your debts is more than the value of all your assets. (Exclude “exempt” assets from this calculation—assets that are protected from your creditors.) (Section 101(32)(A))
The point is that if you shouldn’t be selling or giving away an asset without getting paid enough for it—in money or in anything else of value—when you’re in the red. You shouldn’t be in effect giving away assets that you should instead pay to your creditors. And if you do and within two years thereafter you file bankruptcy, your trustee could try to undo that transfer, sell that asset, and distribute the sale proceeds among your creditors.
(There are 3 other very specific circumstances that can result in a fraudulent transfer. But those are rare and beyond what we can cover in this blog post. (Section 548(a)(1)(B)(ii)(II, III and IV)
Fraudulent transfers are one of the more complicated concepts in bankruptcy. These last two blog posts have just given a very basic overview. One of the key benefits of working with highly competent Louisville bankruptcy lawyer is that these kinds of potential problems can be found, discussed, and resolved to your advantage.