Unless a person facing bankruptcy that handles property transfers within the limits that the law places on them, they could have their bankruptcy denied and find themselves worse off than before filing.
"In a misguided effort to protect the property, the debtor might decide to transfer ownership to a relative, or a trusted friend, without being paid fair value for the item," writes Minnesota attorney Craig Andresen, for the Bankruptcy Law Network. "The debtor no doubt believes this will shield the property, because if he no longer owns it, how could it be taken by a creditor or by the bankruptcy trustee?"
There are several sections of federal laws that address the consequences of transferring property prior to filing bankruptcy. For an individual who is petitioning for a Chapter 7 bankruptcy, section 727 forbids a debtor from moving property to another's possession for one year before filing. In addition, section 548 allows the court trustee to recover transfers that were made for less than fair value during the two years before the bankruptcy petition is filed.
Even in non-bankruptcy situations, in which a property is transferred to another owner to prevent a creditor from taking it, most state laws allow creditors to recover the transferred property if fair value was not paid for it or the motive of the debtor was to evade an unpaid bill.
For those in a Chapter 13 bankruptcy, when a court-ordered repayment plan allows debtors to keep their assets, transferring property improperly may result in having their payment plan denied. If that happens, the court is likely to convert their bankruptcy action to a Chapter 7 case, in which their property could be sold to pay creditors.
If the court trustee suspects that a property transfer has been made to protect the asset from being taken by a creditor in a Chapter 7 petition, the court can obtain the property, sell it to pay creditors and deny the bankruptcy by refusing to discharge the debts in the case.
"For some persons, losing property might simply be the price to pay for obtaining a Chapter 7 discharge," states Andresen. "Accordingly, the debtor should consider the option of simply filing bankruptcy and expecting to lose the transferred asset."