Can I give gifts to family members without triggering the fraudulent transfer rules in bankruptcy?

If you are planning to file for bankruptcy in the near future, it is important to consider the gifts you have given to family members in the recent past. Giving large gifts or transfers that are under fair market value to an “insider” within two years of filing for bankruptcy can trigger the finding of a fraudulent transfer under federal law. An insider is someone who is related to or close to the individual or business, like a family member, another member of the business entity or other affiliate of the individual or business. Further, while federal law only looks back two years, many state bankruptcy laws include their own version of the fraudulent transfer time period. In some states, the court may look back for a period of up to seven years before the debtor filed for bankruptcy to determine if there were any fraudulent transfers.

How Courts Uncover Fraudulent Transfers

While there are several ways a court may find a fraudulent transfer, it is important to note that a fraudulent transfer can be voluntary or involuntary, as well as intentional or in good faith. A court will find a fraudulent transfer when a debtor transfers his assets to an insider for the purpose of protecting his property from future bankruptcy proceedings. A court may also find a fraudulent transfer when the debtor gives a large gift to a family member, with no intention of trying to shield the asset from his creditors.

Unfair Preference Fraudulent Transfers

Another type of fraudulent transfer is an unfair preference. This means that when an individual or a business favors a creditor or pays off one particular creditor too soon after filing for bankruptcy, this unfair preference can trigger the finding of a fraudulent transfer. While many people would prefer to pay back family members before other creditors, this can cause problems down the line. Under federal law, a large payment to an insider is an unfair preference when made within one year of filing for bankruptcy. A large payment to a creditor is an unfair preference when made within three years of filing for bankruptcy.

Consequences of Fraudulent Transfers

When a fraudulent transfer is found, the court will recover the property or the value of the property and consider it an asset for bankruptcy purposes. Further, if the court finds that the fraudulent transfer was done to intentionally shield the asset from bankruptcy, the court will not allow the debtor to go through with the bankruptcy.

Case Studies: Gifts to Family Members and Fraudulent Transfer Rules in Bankruptcy

Case Study 1: The Insider Transfer

In this case study, Sarah, who was facing bankruptcy, transferred a significant amount of money to her sister just a year before filing for bankruptcy. The court considered this transfer as a fraudulent transfer under federal law, as it involved an insider. The court ordered the recovery of the transferred funds, treating them as assets for bankruptcy purposes.

Sarah’s intention to protect her property from bankruptcy proceedings was evident, leading to the court denying her bankruptcy request.

Case Study 2: Large Gift to Family Member

John decided to gift a valuable piece of property to his son shortly before filing for bankruptcy. However, the court found this gift to be a fraudulent transfer since John had no intention of shielding the asset from his creditors. The court recovered the property’s value, considering it an asset for bankruptcy purposes.

John’s attempt to favor his family member over other creditors resulted in complications and the rejection of his bankruptcy petition.

Case Study 3: Unfair Preference Payment

In this case study, Laura, facing bankruptcy, paid off a substantial debt owed to her brother just a few months before filing for bankruptcy. The court considered this payment an unfair preference, as it favored a specific creditor and occurred within the one-year period preceding bankruptcy.

As a result, the court treated the payment as a fraudulent transfer, recovering the funds and considering them as assets for bankruptcy proceedings.