The bankruptcy trustee can sell assets you no longer own for the benefit of your creditors.
What, you say? If it isn’t mine, what rights do my creditors have in those assets?
It all depends on how you parted with property as to whether bankruptcy law allows the trustee to recover the asset for creditors.
Trustee avoiding powers
The bankruptcy code gives the trustee the power to avoid (or recover) fraudulent transfers made within two years of the filing of the bankruptcy case.
A fraudulent transfer is one where the owner of the asset gets less than the asset is worth when he disposes of it.
The transfer could be intentionally fraudulent: “I’d rather my children have this grand piano than lose it to creditors”
There, the intent was to keep something valuable away from creditor.
On the other end of the scale, a charitable donation is a fraudulent transfer because the donor doesn’t receive the donation’s value in return.
In legal parlance, the person parting with the asset gets less than “reasonably equivalent value.”
The intent was innocence, even laudable. But under the law, you can’t give your property away to the detriment of your creditors.
Inviting trouble
Facing a bankruptcy filing, there’s a wide spread thought among debtors that “if it isn’t in my name, it isn’t mine” or “if I give it to my [brother, parent, friend] the trustee can’t take it.”
As a bankruptcy lawyer, I have to teach clients this bit of bankruptcy law: not only is changing title on stuff on the eve of filing ineffective, it also exposes the recipient to a law suit by the trustee. Not a very comfortable thought for most clients.
So, heads up when your lawyer asks whether you have transferred anything of value in the past two years. If it was done with intent to hinder your creditors, you might not be eligible for a bankruptcy discharge at all. Done innocently, the transfer may suggest you wait to file until the transfer is beyond the statute of limitations on trustee avoidance.
Photo credit: umjanedoan (via Flickr)
