Attorney at Law
Moving Assets Prior to Bankruptcy
There’s two words I have to say about moving assets such as houses and cars out of your name prior to bankruptcy: Bad idea. For some reason some people seem to think that they are smarter than the court system and they can just sign the deed to their paid-off home over to their brother and then file bankruptcy without having to worry about losing their home.
The US Bankruptcy Court has been doing bankruptcies for a couple hundred years now and it’s seen a thing or two. Certainly it has seen plenty of the kinds of amateurish strategies that people come up with in vain attempts to circumvent the bankruptcy code. In other words, no matter how smart you think you are, it is almost certain that the bankruptcy court is smarter. Thus, if you move valuable paid-off property out of your name prior to bankruptcy you are likely to trigger what is known as an action to “avoid” the transfer of property. What that means is that the bankruptcy court is going to order the property moved back into your name so it can be sold and the proceeds distributed to your creditors. If the transfer is
impossible to undo because the property has changed hands too many times, has disappeared, or for other reasons, then the consequences are probably going to be even worse: The bankruptcy court may deny your bankruptcy discharge, meaning that not only will your debts not be eliminated by the current bankruptcy but they will become permanent. In other words, now the only way to eliminate those debts will be to pay them off in full. They cannot be eliminated by another bankruptcy filing, even if you follow all the rules and do not attempt to abuse the process on the second time around.
That being said, there is something called “pre-bankruptcy planning.” It is a very grey area of the law and is very dangerous, especially for people who are inexperienced at interpreting the bankruptcy code. There are certain types of pre-bankruptcy planning that courts have approved, such as spending down cash—such as a personal injury settlement or
bonus you obtained at work—on reasonable and necessary living expenses prior to filing bankruptcy. Even so, if you
are going to do this sort of thing then it needs to be done extremely, extremely carefully, and every expenditure you make needs to be documented with receipts so you can show what happened to the money. If you think you need to engage in this kind of activity then you need to retain an experienced attorney and you need to do it as early as possible, before you have actually disposed of any of the money.
Other types of pre-bankruptcy planning, such as moving assets into the name of a friend or family member in exchange for no money or other value, or moving assets into the name of a trust that you created to protect yourself from your own creditors, are viewed as totally illegitimate. Unfortunately, there are still plenty of attorneys out there who will take your money to help you come up with these sorts of strategies, but they either don’t know what they’re doing or they are downright crooks. If you have debt problems and substantial assets you want to protect please avoid these kinds of “too-good-to-be-true” strategies and retain a competent attorney who can steer you through the process without utterly destroying your life and potentially sending you to prison.