People thinking about filing bankruptcy are understandably concerned they may lose some of their property. They claim to have heard stories or read something on the Internet about people losing property after filing bankruptcy. In fact, people filing bankruptcy almost never lose any property because it’s exempt under state or federal law. But the concern still causes people to ask whether they should sell or transfer property before filing. In some cases they do it without first asking a bankruptcy attorney.
In Iowa, after filing bankruptcy the trustee can look back at any transfers made within the prior four years. If a transfer was made for the purpose of hindering, delaying or defrauding creditors the trustee can set aside the transfer. This brings the property back into the bankruptcy to be administered by the trustee. While proving a transfer was made to hinder, delay or defraud creditors might be difficult, the trustee can also set aside a transfer when an insolvent debtor didn’t receive a “reasonably equivalent value” in return. In general, this means if the debtor sold or transferred property for less than its fair market value the trustee can set aside the transfer. In most cases these kinds of transfers are those between family members. Selling or transferring property to family members for less than the property’s value are the most frequent types of transfers causing problems for debtors in bankruptcy. Even removing names from titles to property such as vehicles can be considered a transfer that could be set aside by a trustee if nothing was received in exchange.
On the other hand, selling property before bankruptcy might be advisable if there’s a chance it won’t be exempt and protected from being sold by a trustee. This type of “exemption planning” is both proper and approved by courts if done correctly. The difference between a fraudulent transfer and an acceptable sale before filing bankruptcy can often depend on who was sold the property, for how much, when the transfer took place and what was sold or transferred. For this reason anyone planning to file bankruptcy should never make transfers of property without first consulting a good bankruptcy attorney.