What Happens if I Transfer Property Before Filing Bankruptcy?

When you file bankruptcy, you’re required to list your assets, debts, income, and expenses. But you’ll also need to disclose any property transfers you made in the two years before filing. While transferring property before bankruptcy isn’t always a problem, the bankruptcy trustee can undo transfers if they find them to be fraudulent.

This article explains what qualifies as a transfer, how fraudulent transfers are defined, the consequences of making one, and what steps you can take if you’ve recently transferred property before filing bankruptcy.

Is It Legal To Transfer Property Before Filing Bankruptcy?

Transferring property before filing bankruptcy can be tricky. If the court believes you transferred property to hide it from creditors, it may consider the transfer fraudulent. This could lead to serious consequences. The court might reverse the transfer, impose penalties, or even deny your bankruptcy discharge. If you’re considering filing bankruptcy and have concerns about a recent property transfer, you can set up a free consultation with a bankruptcy attorney to get personalized legal advice about your case.

What Is a Property Transfer Anyway?

Under the Bankruptcy Code, a transfer happens any time you sell, give away, or give up your legal rights to an asset. Common examples of transfers include:

• Selling your car or other property to someone else

• Gifting money or property to another person

• Donating money to a charitable organization

• Transferring ownership of property, such as signing over a house deed or car title

If you’ve made any of these types of transfers before filing bankruptcy, you’ll need to disclose them in your bankruptcy paperwork.

That said, not every transaction is considered a transfer under bankruptcy law. Here are some examples of things that aren’t considered transfers:

• Letting someone borrow your car, as long as your name stays on the title

• Giving small gifts for birthdays, holidays, or special occasions (within reason)

• Donating items, like clothing or household goods, to a charity such as Goodwill

• Tithing or donating to a religious organization, as long as your contributions are less than 15% of your gross annual income

These types of transactions typically don’t count as transfers because they don’t involve giving up ownership of significant assets. 

What Happens to Your Property When You File Bankruptcy?

When you file bankruptcy, all the property you own becomes part of what’s called your bankruptcy estate. This includes most of your assets at the time of filing, such as your home, car, and bank accounts. The bankruptcy trustee — the person appointed to oversee your case — manages this estate. In Chapter 7 bankruptcy, the trustee can sell non-exempt property to repay your creditors.

Luckily, bankruptcy laws allow you to protect most, if not all, of your property using exemptions. Bankruptcy exemptions are rules that let you keep essential property, like your home or car, up to a certain value. For most people filing Chapter 7, exemptions protect everything in their bankruptcy estate, meaning there’s nothing left for the trustee to sell.

How Property Transfers Fit Into the Bankruptcy Process

The bankruptcy trustee’s job isn’t just to handle property you currently own. They also review any property you’ve sold, gifted, or transferred in a certain time period before filing. This is because transferring property can affect the value of your bankruptcy estate, especially if the transfer was done to hide assets or avoid paying creditors.

Under the Bankruptcy Code, the trustee has the authority to undo certain transfers if they determine the transfer was fraudulent. This includes transfers made within the look-back period, which is usually the two years before your filing date. In some cases, like transfers to a self-settled trust, the look-back period can be longer (up to 10 years). Your state’s laws might also allow the trustee to look further back for specific types of transfers.

It’s important to understand that not all transfers are a problem. For example, selling property for its fair market value or giving away small, insignificant items typically won’t raise red flags. However, if you gave away something valuable or sold it for far less than its worth, the trustee may view this as a fraudulent transfer.

The Trustee’s Role in Investigating Transfers

The trustee’s primary responsibility is to ensure your bankruptcy estate is handled fairly and that all property and transactions comply with bankruptcy laws. If the trustee finds that you sold, gifted, or transferred property to avoid paying creditors, they can take action to bring that property back into your estate.

For example, if you sold your car to a friend for $500 when it was worth $5,000, the trustee could undo the sale, recover the car, and sell it at its true value to repay your creditors. Similarly, if you transferred a valuable asset to a family member just before filing, the trustee could investigate and possibly reverse that transfer.

The trustee’s power to investigate transfers ensures that no one can sidestep bankruptcy laws by moving property out of their name before filing. This is why it’s crucial to disclose all property transfers from the last two years in your bankruptcy paperwork and to be prepared to provide documentation if needed.

What Counts as a Fraudulent Transfer?

Just because a transfer happened during the look-back period doesn’t mean it’s automatically a fraudulent transfer. The Bankruptcy Code identifies two types of fraudulent transfers (sometimes called fraudulent conveyances): actual fraud and constructive fraud.

Actual Fraud vs. Constructive Fraud

Intent, or the reason you transferred property, is the key factor in determining whether a transfer is considered actual fraud. If you transferred an asset with the intent to delay or defraud your creditors, that would likely be considered actual fraud. In other words, a transfer is actual fraud if the reason you transferred the asset was to keep your creditors from getting it during your bankruptcy case. 

Unlike actual fraud, constructive fraud can happen even if you didn’t intend to deceive or defraud anyone. A property transfer can be considered constructive fraud if both of the following are true:

• You received less than the property’s fair value. This could happen if you sell an asset for far less than it is worth or give it away for free.

• You were insolvent at the time of the transfer or the transfer made you insolvent. Being insolvent means your debts are greater than the total value of your assets. By law, it’s presumed that you were insolvent during the 90 days before filing for bankruptcy.

For example, let’s say you needed money quickly and sold your car, which was worth $9,000, for only $5,000. If this happened while you were insolvent — or the sale caused you to become insolvent — the transfer could meet the definition of constructive fraud. Even though you didn’t intend to defraud anyone, the transfer might still harm your creditors because it reduced the value of your bankruptcy estate.

Are All Transfers Before Bankruptcy Considered Fraudulent?

No, not all transfers are considered fraudulent, even if they happened during the look-back period. Some transfers are perfectly acceptable under bankruptcy law.

For example, if you sold an asset for fair market value, the transfer usually isn’t considered fraudulent. That’s because the value of the property leaving your estate is equal to the money or property you received in return. In this case, the transfer doesn’t reduce the overall value of your bankruptcy estate.

Similarly, if you transferred an asset that’s exempt, it’s usually not considered fraudulent. If you could have claimed the asset as exempt when you filed bankruptcy, the transfer likely won’t be an issue. Even if the trustee reversed the transfer and brought the asset back into your estate, your exemption would prevent them from liquidating or selling it to pay creditors.

Finally, giving away property with little or no resale value typically isn’t a problem. If the asset wouldn’t bring in much money for your creditors, it’s unlikely to raise red flags. For example, small gifts, old household items, or other belongings without significant market value probably won’t affect your bankruptcy case.

What if I Need To Transfer (or Already Transferred) Something?

If you need to sell or give away property before filing bankruptcy, or if you’ve already transferred property in the past two years, preparation is key to keeping your case on track. Keep detailed records about the transfer and bring copies to your meeting of creditors so the trustee can review them. Be prepared to explain how you spent any money you received from the sale.

Make sure to fully disclose the transfer on your bankruptcy forms, especially in your Statement of Financial Affairs. Provide as much detail as possible and have supporting documentation ready if needed. Being open and honest about any transfers can help the trustee’s review go more smoothly and keep your case moving forward.

Certain transfers will always raise red flags with the trustee, such as:

• A transfer to a family member, business partner, or another insider.

• A transfer that happens right after a creditor sues you or threatens to sue you. You’ll likely need to show that you didn’t just transfer the asset to protect it from the lawsuit.

• A transfer that appears to be in name only. For example, if you transferred your car title into your sister’s name but still have the car and drive it regularly, you’ll probably need to explain why you transferred the title.

• A transfer that’s not listed in your bankruptcy paperwork. If you forgot to list something, you can amend your paperwork to include it.

Avoid these red flags if you can, or be ready to explain them if they’ve already happened. If you intentionally transferred assets to keep them from creditors, consider speaking with a local bankruptcy attorney. Waiting to file bankruptcy to bypass the look-back period could also be considered bankruptcy fraud, so it’s important to understand your options. Many bankruptcy lawyers offer free consultations and can provide legal guidance tailored to your unique situation.

What Happens if the Trustee Determines a Transfer Was Fraudulent?

If the trustee determines that a transfer qualifies as fraud under the Bankruptcy Code, they will likely file a motion to void — or undo — the transfer. This means the trustee can recover the transferred asset from the person who received it. Once recovered, the asset becomes part of your bankruptcy estate, and the trustee can sell it to repay your creditors.

In cases involving actual fraud, the consequences can be more severe. The trustee may ask the bankruptcy court to deny your discharge or dismiss your case entirely. In serious situations, actual fraud can even lead to criminal charges for bankruptcy fraud or perjury.

Let’s Summarize…

If you transfer assets before filing bankruptcy, the trustee can undo transfers deemed fraudulent and liquidate the assets to pay creditors. Fraudulent transfers include selling property for less than its value while insolvent (constructive fraud) or transferring assets to hide them from creditors (actual fraud). Make sure to disclose all recent transfers in your bankruptcy forms and provide documentation to explain them if needed. Being upfront can help avoid complications with your case.