Every week, our office speaks with many Georgian families about the best ways to recover and rebuild their financial lives in the wake of the recent economic crisis. One solution to debt problems is to file for bankruptcy. Filing for bankruptcy is not the right move for everyone (which is why it is so critical to speak with a bankruptcy attorney before beginning this process). Additionally, even if bankruptcy is the best decision for your family, there are many considerations that must be taken into account in order to gain the most benefits from doing so. Read on to learn more about one consideration, the transfer of property, that must be kept in mind when developing any bankruptcy strategy.
Why are Property Transfers Important?
Property transfers in the context of bankruptcy are so important to consider because if you transfer property before filing your bankruptcy application, the bankruptcy court may think that you did so in order to “game the system” and gain different benefits for which you might not otherwise qualify. If this happens, your bankruptcy application could be denied and other undesirable consequences may occur.
The bankruptcy court will take into consideration several different factors when evaluating whether or not you transferred property in order to take advantage of the bankruptcy system. These factors include why and when you transferred the property, what type of property was transferred (i.e. whether it was nonexempt or exempt), how you spent whatever proceeds you received from transferring the property, and whether you transferred the property for its fair market value.
Exempt Property vs. Nonexempt Property
For bankruptcy purposes, “exempt property” is property that creditors cannot sell in order to obtain proceeds to be applied against your debt. If you file for bankruptcy, you can keep exempt property and you can also typically transfer this property without any issues (since the bankruptcy court couldn’t use this property to pay off your creditors anyway). What qualifies as exempt property varies from state to state but usually includes some portion or all of your household residence, motor vehicle, certain goods, and retirement accounts.
Nonexempt property is basically all property which is not exempt. Nonexempt property can be sold in order to satisfy your creditors – which is why the bankruptcy court will likely scrutinize any transfer of nonexempt property.
Transferring Nonexempt Property in Order to Buy Exempt Property
Some people think that they can simply maximize their amount of exempt property by transferring their nonexempt property and using the proceeds to purchase more exempt property. However, this type of maneuvering, which is commonly referred to as “prebankruptcy planning” is exactly what the bankruptcy court tries to discourage.
To do so, the bankruptcy court can investigate a prebankrupcty transfer of property. Depending on the property involved and the reason for the transfer, the court may be able to look at prebankruptcy transfers that occurred three, five, or even ten years ago.
The court will also look to see whether your received the fair market value for the property you transferred. If you did not, the court may conclude that you transferred the property with the intent to delay, hinder, or defraud your creditors, and the bankruptcy trustee assigned to your case may file a lawsuit in order to reclaim the property from whoever received it.
Additionally, the court may look to what you purchased with the transfer funds you received. Did you buy more exempt property? Did you go on a luxury vacation? Did you pay off your debt to just one creditor completely and leave others out in the cold? Depending on the answers to these questions, the bankruptcy trustee may file additional lawsuits against you.
To learn more about how property transfers may affect your bankruptcy options, contact our office today. We look forward to speaking with you!