A frequent problem for debtors in bankruptcy are the transfers of property and loan payments to family members before filing. In bankruptcy, fraudulent transfer refers to the transfer of assets by debtors with the intention of defrauding creditors. These transfers before someone files bankruptcy can create serious problems and may include transferring assets for less than fair market value to a friend or family member. By trying to get rid of assets, debtors may think they are shielding them from creditors and the trustee.
But bankruptcy trustees have the authority to challenge transfers made by debtors before filing bankruptcy. The trustee can try to recover the transferred assets or their value from the person to whom the assets were sold or given. Most assets, however, can either be exempted in a bankruptcy or sold for fair market value prior to filing bankruptcy, so trying to get rid of them before bankruptcy can be unnecessary and problematic. That’s why it’s important that people considering bankruptcy not transfer property without first getting advice from an attorney.
Another practice that creates problems for debtors is repaying loans to family members before filing bankruptcy. Called a preference payment, bankruptcy law allows trustees to set aside or retrieve payments made to a family member within one year of filing bankruptcy. There are some exceptions or defenses to these trustee actions, but making payments before filing bankruptcy can often result in the trustee taking back the money paid to a debtor’s family member. The purpose is to prevent the family creditor from receiving preferential treatment over the debtor’s other creditors.
In summary, property transfers and preference payments to family members can complicate Chapter 7 bankruptcy proceedings for debtors. It’s better to not make any property transfers to family members and stop any loan payments until you consult with a bankruptcy attorney.