Bankruptcy law has traps for the unwary as any area of law, and here are two very important ones. They are traps because they seem to not only go against common sense, but against what would otherwise be the honorable and the morally right thing to do.
These two have to do with transactions—transfers of your possessions and your payments on debts—made within a certain amount of time before you file bankruptcy. If you have a vehicle that you don’t need, it seems sensible to give it to someone who does need it, such as an adult son or daughter leaving home. Or if you owe a close friend or a family member a personal debt that you don’t want to involve in your anticipated bankruptcy case, it sure seems rational to clear up that debt beforehand. But in both cases you’d seriously risk creating serious problems for those very people you are trying to help.
The Trustee’s “Avoidance” Powers
The problem with these two situations is that if you give away the asset or pay a debt BEFORE you file your bankruptcy, then AFTER your bankruptcy is filed your bankruptcy trustee can undo what you did, in a way that would likely hurt both you and the person you were trying to be good to.
The trustee can force the person who received your vehicle to surrender it to the trustee. Imagine the shock if your adult child got a letter from the trustee demanding that the vehicle be handed over to the trustee because of your bankruptcy.
Similarly, the trustee can force the person you paid shortly before the bankruptcy to give that money to the trustee, no matter if that money had been spent by that person long before then.
Fraudulent Transfers and Preferences
The two concepts just described—“fraudulent transfers” and “preferences”—are among the most complicated ones in consumer bankruptcy. Sections 548 and 547 of the U.S. Bankruptcy Code on those two concepts, respectively, are about 1,200 and 1,375 words long.
Very basically, a “fraudulent transfer” is a transfer of property by a person who later files bankruptcy, in which the transfer was either made with the intent to defraud or for which the person received less than the transferred property’s value in return. The transfer is not necessarily fraudulent, nor done with any bad intent.
Very basically, a “preference” is a payment on a debt made by a person who later files bankruptcy, in which the payment was made while the person was insolvent (owed more in debts than had assets) AND that payment resulted in the creditor receiving more than it would have received through a bankruptcy distribution if bankruptcy would had been filed at the time of that payment. Here again it doesn’t matter whether the person who paid the debt had any bad intent.
Clearly, these are not straightforward parts of bankruptcy law. If you are concerned whether you transferred something or made a payment which could become an issue in your upcoming bankruptcy case, at the office of bankruptcy attorney Carrie Weir I would be happy to review your situation with you and advise you. I provide a free initial consultation to anyone with questions or concerns about filing bankruptcy. Please reach me at my office by using the contact form here or by calling me at 972-772-3083 to arrange a private meeting. I represent clients in Rockwall, Heath, Greenville, Lavon, Wylie, Mesquite, Rowlett, and the surrounding areas.
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