It shouldn't take more than a few visits to our blog for you to find a slew of posts about how to prepare for your bankruptcy and manage all the relationships along the way, like those with your attorney and bankruptcy trustee.
Like any relationship, the ones that are forged during a bankruptcy should be built on trust. That is, you need to be upfront with everyone and every entity involved, even your creditors, to ensure that in the end you wind up where you need to be. A large part of building that trust has to do with how you handle the disclosure of your assets. The following point almost deserves to be in all caps, but no one likes to be yelled at, so: never try to hide or transfer assets with the intention of shielding them from creditors.
Okay, now that the lecture is over, it should be noted that sometimes people transfer assets with good intentions. A constructively fraudulent transfer is not an deliberate attempt to hide an asset but is looked down upon by creditors because quite often, the gift or item in question is transferred at a value less than its actual worth. For a simple example, imagine you sold a $25,000 SUV for $15,000 out of simple desperation to raise cash for the bankruptcy. Sure, you now have cash, which is still an asset, but the creditor would have preferred the $25,000 SUV. And you can rest assured, they'll make a case out of it.
Consider these additional examples of constructively fraudulent transfers:
- Ty Webb gives Lacy Underall $10,000 to help her move from dreary old Manhattan to a high-end suburban country club. His creditors will end up pretty unhappy with Ty's attempt to secure his girlfriend a spot at the club pool because that money could have been used to pay his debt. Worse yet, he received no real asset in return. As a result, the bankruptcy trustee handling Ty's case will most likely try to sue Ms. Underall for the money. Since Ty's asset transfer wasn't an attempt to hide anything, his bankruptcy will probably go through as planned. But now his girlfriend is involved, and that doesn't bode well for Ty's post-bankruptcy dinner plans.
- Al Gore, on the cusp of bankruptcy and in a last-ditch effort to remain relevant, decides to switch political parties and attend an expensive fundraising dinner for the Green Party candidate in the 2012 election. He pays $50,000 to attend. Once he officially files for bankruptcy, the court immediately rules that the party candidate's election committee needs to relinquish Mr. Gore's donation to the trustee because it was ruled that the dinner was not equal to $50,000 cash that could be used to pay creditors.
As you can see by the example above, even donations are subject to becoming constructively fraudulent transfers in the eyes of the court. Large donations to churches, schools and other non-profits can all be retrieved by the trustee if they result in the reduction of an asset's value or are considered an attempt to quickly move money and thus, diminish the trustee's ability to obtain proper restitution for your debts. There has been some action against this practice, however. In 1998, a contingent of religious organizations successfully lobbied for the Religious Liberty and Charitable Donation Protection Act, which was formulated to protect good-faith monetary gifts of up to 15 percent of a person's gross income based on the year before filing bankruptcy.
If you're considering filing for bankruptcy, it's important to talk to a bankruptcy attorney early to avoid an innocent mistake like the ones described in this post. In North Carolina, call the Law Offices of John T. Orcutt for a free initial consultation. +1-919-646-2654.