You might already know about the problems associated with fraudulent transfers. These are claims brought before the bankruptcy court by the trustee or by creditors which allege that you purposefully transferred property to someone with the intention of keeping it out of the hands of your creditors. If it is determined that you transferred the property with the intent to hinder or defraud a creditor, you could seriously jeopardize your bankruptcy, or worse, face some prison time. Hopefully if you've heard about fraudulent transfers, you know enough not to attempt them.
To complicate matters, the law will also look upon a transfer that wasn't "actually" fraudulent as "constructively" fraudulent if you make a transfer, receive something in exchange, but the something you receive is not reasonably equivalent in value to the item you transfer. You see, sometimes people are really not trying to protect assets for themselves; they simply make a gift that is too generous in the eyes of the bankruptcy court, inappropriate in light of your obligations to your creditors. Making such a transfer will leave you with a diminished estate, meaning unsecured creditors will receive less in your bankruptcy than if the transfer had never occurred. In such a situation, it is the trustee's obligation to recover the value of the transfer, and distribute this value to your unsecured creditors.
Here are a few examples of potentially innocent or well-intentioned actions that could be regarded as constructively fraudulent by a bankruptcy court. Maybe you want to help a loved one out, so you sell something you own which is worth $10,000.00 for far less, say $5,000.00. While it's understandable that you want to give your family member a good deal, you could be leaving your loved one exposed. The court might decide that because of your insolvency, your sale was really intended to shield your assets from creditors.
The Trustee could then sue your relative for the difference in value. This is definitely not a situation you want to be in.
Another example is making a large donation or contribution to, for example, a political candidate, in the form of a large purchase of gift, on the eve of the bankruptcy. Here, too, the court will probably go after the beneficiary of your purchase to recover the value of the contribution. In all these examples, you weren't attempting to save the asset for yourself, or attempting to get something in return in an immediately tangible fashion. However, your action will be frowned upon by the court because it will appear irresponsible given your probable intention to declare bankruptcy in order to rescue yourself from financial peril you were surely aware of.
One possible exception to this rule are good faith donations made to a church. A number of religious organizations worked together to promote the Religious Liberty and Charitable Donation Protection Act, and it was passed in 1998. Under the act, donations you make to your church will not trigger action against the church so long as the contribution was equal to no more than 15 percent of your income during the year preceding bankruptcy. If you consistently contributed in amounts exceeding that 15 percent ceiling, the court may allow those to pass as well. Warning! Don't take this to mean that you have carte blanche to give away money on the eve of the bankruptcy on the theory that it's better to give it to anyone just to keep it from your creditors. If the court figures out that such was your intention, your church could get sued.
To avoid these problems in your bankruptcy, it's very important that you speak with an experienced attorney early in the process. If you have significant assets, chances are they are at least somewhat protected by your state's exemption laws. This means there's no chance you'd lose the asset in a bankruptcy. However, once you've made the transfer of the asset, you lose your right to claim the exemption.
If you're thinking about bankruptcy but are worried about losing your possessions, talk to an experienced bankruptcy attorney today. In North Carolina, contact the Law Offices of John T. Orcutt. No charge for your initial consultation, and we have 4 convenient offices to choose from. Call 1-888-234-4181 today.