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Transferring Or Selling Assets Before Filing Bankruptcy

Robert J. Adams and Associates March 10, 2014

Frequently, individuals ask about giving property away, such as a car, just before filing a Chapter 7. These transfers not only fail to help the bankruptcy process, the transfers might be unnecessary with the right legal advice.


Maybe an individual has a car worth $15,000 that they do not want to lose if they file a bankruptcy. They decide to sell the car for just a few dollars to a relative on the eve of filing a Chapter 7.

The Bankruptcy Code has a provision that allows Chapter 7 trustees to undo such transfers and sell the property for the benefit of the estate. It is called a Fraudulent Conveyance.

A Chapter 7 trustee can file an Adversary Complaint to bring the property back to the estate if the trustee can prove certain elements.

  1. On the date of the transfer the Debtor was insolvent: meaning liabilities exceed assets.

  2. The entity filing bankruptcy received less than the equivalent value for the property transferred.

  3. The transfer can be voluntary or involuntary.

  4. The transfer was within 2 years of filing of the case. However, trustee often use their own state’s similar law which is often for a larger call back period. Illinois for example has a 4 year call back period.

The issue of insolvency can include transfers of property when it is likely he/she will incur debts beyond one’s ability to repay. An example might be on the eve of a trial which will likely result in a judgment that can’t be repaid.

Chapter 7 trustees have been known to file suit to upset a Divorce judgment where the Debtor was ordered to transfer property to the former spouse when the trustee believes that the purpose was to remove the property from reach of creditors.


There are two types of fraud described in the section covering Fraudulent Conveyances: actual fraud and constructive fraud.

Actual fraud: an actual intent to remove the property from the reach of creditors. This fraud generally applies when there are suspicious circumstances or an especially bad relationship with a creditor. The penalty for actual fraud can result in a denial of discharge and possible criminal charges.

Constructive fraud: the transaction was an unfair exchange: sold a $5,000 asset for $2,000. The penalty for constructive fraud where the transfer is not listed on the schedules can also result in a denial of discharge and in certain cases criminal charges. The chances of such extreme penalties are less likely when there is only constructive fraud.


There are some other transfers but they mainly relate to Business Debtors.

An involuntary transfer that can be undone includes a judicial sale resulting in a sale for much less than the value of the property.

An exception to the trustee’s ability to undo a transfer is religious or other charitable contributions up to 15% of the gross income of the person in the year of the transfer.

Another frequent penalty is the loss of a possible exemption to that asset.

If one files Chapter 13 all transfers described above must be listed as assets subject to allowable exemptions. Such transfers can affect the dividend to general unsecured creditors.


Honesty is always the best policy. And, if there has been any transfer of property this should be discussed with your attorney. Here at Robert J. Adams & Associates we have the experience to give you the best advice on any transfer you made or are thinking of making.