Bankruptcy looms on the horizon as your financial situation worsens.  You may be told to just transfer certain assets to family or friends to “protect” them from your creditors.  Those persons giving that advice mean well, but likely do not know the ramifications of those transfers.  So be careful because the last thing you want to happen is to jeopardize your bankruptcy discharge.

Arms Length Transactions.

There are generally two categories of transfers of property immediately before filing bankruptcy.  The first is “arms length transactions.” An Arms Length Transaction is a sale or transfer of assets where you receive “fair value” at the time of the transfer.

Imagine a scenario where you are struggling to make your house payments.  You have a car on which you owe no money.  The car isn’t a necessity because you have a car furnished in your work.  If you decide to sell the car, pocket the cash and use a portion of the money to pay your bills, including your house payment, you shouldn’t be creating a problem if you receive fair value.  You can even sell the car to a friend provided you receive fair value.  So what’s fair value?

Of course every case is fact specific but there are a few things that can guide you.  What are similar vehicles selling for on ebay.com or craigslist.com?  What are similar vehicles being listed for in the local paper?  When it comes to vehicles there are national valuation services like www.nada.com that may be helpful.  (You will probably have trouble finding a listing for the 1960 BMW 1600 smart car shown in the picture.)  You don’t have to get the exact value you discover from these sources.  Those values are just a guide.  Just be confident that you are getting a reasonable value for the car based upon its age and condition and be prepared to document your belief if called upon to do so.

The same analysis would apply to other items of property such as a boat, a watch, ATV or tools.  For many of these, there is no public guide like the NADA so rely more heaving on ebay and craigslist.

Brother-in-law Transactions.

The second category of transfers is what I refer to as a “brother-in-law” transfer.  This occurs when you transfer property for significantly less than its true value to a friend or relative.  There is often the presumption that the reason you did this is so that after your financial troubles are behind you, then your friend or relative to transfer the property back to you.  Under the law this is referred to as a ‘fraudulent transfer.”  In addition to the risk that the bankruptcy trustee may file a lawsuit to recover the property, you also bear the risk that you may lose your discharge.

Note to self:  Never, never, never do anything that might cause you to lose your bankruptcy discharge.

Fraudulent transfers usually bear what’s referred to as “badges of fraud.”  These are things like inadequacy of sales price, transfers to family members or close friends, and transfers after notice of a possible lawsuit or other financial calamity.  Best advice:  Don’t do it!

If you have to raise money by selling property for way less than its value do two things.  First, document what you believe is fair value and why you would be selling for less.  Second, avoid selling to family members.

Contact Knoxville Bankruptcy attorneys for help.

If you are considering bankruptcy and want to discuss your options, give Knoxville bankruptcy attorney Dan Scott a call at 865-246-1050 to set up a free consultation.

Photo Credit:  Flickr:  the Canuckshutterer