While many of my clients have few assets when they file their bankruptcy, from time to time, I have a client who owns some property that would be considered non-exempt by the bankruptcy rules. When that happens, I discuss my client’s options, which can include some pre-bankruptcy planning. One common practice is to sell certain property that the trustee would auction off to sell (non-exempt property) and use the proceeds to buy property that is protected by Colorado’s exemption rules and that my client would be able to keep. This is a perfectly legal technique, if done properly.
You may be tempted to sell or give away property before you file bankruptcy to keep it away from the bankruptcy trustee. Keep in mind that if you sell (or give away) property for less than its market value within two years of filing bankruptcy, you could get in trouble for making a fraudulent transfer. If you fail to disclose the transfer or the trustee discovers it was for less than its market value (and just so happened to go to your brother-in-law Joe), the person to whom you sold or gave the property could lose it, or you could have your bankruptcy case thrown out.
If you’re reading this after you’ve already gotten rid of some property like this and think you can buy back the property, think again. The trustee can also interpret that as your attempt to deceive him. The best course of action to take is to fully disclose the transfer. True, the person you sold the property to might lose it, but the upside is that you won’t have your bankruptcy case thrown out or be prosecuted for trying to perpetrate a fraud on the court.
Section 548(a)(1) defines a fraudulent transfer in this way:
The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.