Should I Give My Stuff Away Before I File For Bankruptcy?

There are actions you can take to lessen the impact of filing for bankruptcy, and sometimes we advise clients to take those actions.  One thing that never works, however, is giving something away, to a family member or a friend, just before filing for bankruptcy.  In fact, doing so within six years of filing does not work.

The reason this does not work is that there are laws in every state, and in the Bankruptcy Act itself, to stop what are referred to as fraudulent conveyances.  This is any transfer of property for less than its fair value at a time when you are in financial difficulty.  If you live in New York, any transfer within six years of your filing can be reversed.

There are two main elements here.  The transfer is for less than fair value means that you give something away for free or sell it for less than its value.  Thus, selling your car to your brother for $100.00 is a transfer for less than fair value.  Selling something for its real value, or close to it, is usually not a problem.  Clients often sell things before they come to see us as a way of trying to solve their financial problems.  Selling a $5,000 car for $5,000 and using the money to support yourself or your family is okay.  This means, though, that if you have done something of this nature, you should be able to explain where the money went.

Likewise, people often sell houses as their financial problems worsen.  When a house is sold, you will have a closing statement that shows how much money you took away from the sale, and if you can account for where the money went, you will not have a problem.  Such accounting does not mean you have to have documentary evidence of every penny you spent.  If you have no other income and you used $50,000 to support a family of 4 for a year, you will not be questioned further.

The question arises as to why you cannot give your things away, and the answer is that you can.  However, if you are insolvent when you give something away, or giving something away makes you insolvent, then you have a problem.  Being insolvent means that your liabilities (the money you owe) are greater than the value of your assets.  If you are still solvent after you transfer something, you will not have a problem, but people in financial difficulty are seldom solvent after big transfers.

When an improper transfer is made, the trustee who administers your case in bankruptcy will be able to sue to reverse the transfer, or he can sue the recipient for the value of the asset that was transferred, or he can do both.  So if you give your house away to your sister a few years before you file, and there was $75,000 in equity, the trustee can sue your sister for $75,000, even if there is no equity in the house today.

Also, you do not have to give the whole house away to have a problem.  If you are one of four people on the deed, and you sign a new deed taking your name off and leaving the other three on the deed, the others will be considered to have received a transfer of one-fourth of the house, and they will all be sued.

Often when these types of transfers are made, they make matters worse than they could have been.  I have seen in my practice many cases where such a transfer was made but did not have to be because the person in financial difficulty would have kept his interest in the house despite the bankruptcy because of an exemption.

Before you make any transfer of anything of significance, especially when the person doing the transfer is in financial difficulty, it is vitally important to understand the implications of the transfer should they ever have to file for bankruptcy.

 Allan Bloomfield practices bankruptcy law in Forest Hills, Queens. Contact Allan today for a free consultation.

About Allan Bloomfield

For over 30 years, my focus in practicing law has been to help people overcome what seems to them to be insurmountable financial difficulties. I have helped thousands of people file both Chapter 7 and Chapter 13 cases, and in most cases, they are able to keep all of their assets, including homes, cars, their retirement accounts and personal property.