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When Does Transferring Assets Become Illegal in Bankruptcy?
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When Does Transferring Assets Become Illegal in Bankruptcy?
Filing for bankruptcy can be a complicated process. Many people going through bankruptcy try to protect some of their assets by transferring them to friends or relatives before filing. But there are laws against doing this in some cases. So when does transferring assets become illegal in bankruptcy?
Well, it depends. If you transfer assets specifically to keep them out of the hands of creditors and the bankruptcy trustee, that can be considered bankruptcy fraud. But there are also some legitimate reasons you might transfer assets before bankruptcy. The key questions are why you did it, when you did it, and what kind of assets they were.
Lookback Periods
One of the main things that determines if an asset transfer is illegal is timing. Bankruptcy law contains “lookback periods” – specific time windows before you file bankruptcy where asset transfers may be examined:
- 90 days for preferences
- 1 year for insider preferences
- 2 years for fraudulent transfers
So if you transfer assets within these lookback periods, the bankruptcy trustee can try to pull the assets back into the bankruptcy estate. There are some exceptions, but in general transfers during the lookback periods will be scrutinized.
Badges of Fraud
Even for transfers before the lookback periods, the trustee can still challenge the transfer as fraudulent if it has enough “badges of fraud.” These are signs that the transfer was specifically done to hide assets, including:
- No or little money received for the transferred assets
- Assets were concealed after being transferred
- There were pending or threatened legal claims against the debtor when assets were transferred
- The debtor became insolvent after the transfer
The more badges of fraud a transfer has, the more likely it is to be reversed by the court. Even a transfer from 5 years ago could potentially be undone.
Types of Transfers
What kinds of asset transfers tend to cause problems in bankruptcy? Some major categories include:
Fraudulent Transfers
As we covered, any transfer that seems intended to hide assets from creditors can be considered fraudulent. This includes transfers to friends or relatives for little or no money.
“Underwater” Asset Transfers
Transferring an asset that has a lien or loan against it for more than the asset is worth can also spur legal action. This is because creditors were relying on that asset to secure the loan.
Business Asset Transfers
If you own a business, transferring cash or other assets out of the business prior to bankruptcy will likely be challenged. Business assets tend to get much more scrutiny in bankruptcy.
Defenses
If the bankruptcy trustee tries to reverse one of your asset transfers, you do have some potential defenses. For example:
- The transfer was made for equivalent value in good faith
- The transferred assets were exempt property
- You were solvent after the transfer and remained solvent for some time
Showing the transfer was done in good faith, the assets wouldn’t have been seized in bankruptcy anyway, and you were still solvent even after the transfer, can help defend against fraudulent transfer allegations.
When Are Asset Transfers Considered Legal?
There are also plenty of good reasons someone might transfer assets before bankruptcy. As long as these transfers are done in good faith, they should be valid. Some examples include:
- Giving assets to charity
- Getting divorced and dividing marital assets
- Setting up trusts, estates, or inheritances for your children
- Cashing out retirement accounts to pay necessary living expenses
The key is being able to show the transfers were done for legitimate personal or business reasons, not just to hide money from creditors or the trustee.
Talk to a Lawyer First
While there are certainly legal reasons to transfer assets prior to bankruptcy, there are also many potential pitfalls. Consult with a qualified bankruptcy attorney in your state before attempting any asset transfers or filing bankruptcy yourself. An experienced lawyer can review your specific situation and advise whether transfers would be considered legal or not.
Every bankruptcy case is unique, so get personalized legal advice rather than just relying on what you read online. Planning asset transfers without guidance often leads to allegations of fraud that can follow you for years. Don’t take chances – talk to a bankruptcy lawyer first!