Can I shelter property by transferring it to family members prior bankruptcy?
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UPDATED: Mar 18, 2021
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You will likely not be able to shelter property by transferring it to a family member. If you make a gift or other transfer for inadequate consideration to anyone—whether they are in your family or not—a Chapter 7 trustee can recover the property or its value if your case is filed within one year afterward. If you have an actual creditor who would be entitled to avoid the transfer, even in part, under your state’s statutory or common law of fraudulent transfers, a Chapter 7 trustee can exercise that power to avoid the whole transfer. Therefore, gifts to family members (or to anyone else) will not work (but read more about family gifts here for a qualification of this rule).
Let’s say you owe your uncle $100,000 and you repay more than $600 of that debt any time within the year preceding your bankruptcy filing, a Chapter 7 trustee could recover it as avoidable preference. It’s a “preference” if it allows your uncle to recover more than he would recover if he had to share like your other creditors.
The rules about fraudulent transfers apply to anyone, not just family members. The one-year lookback period for preferences applies to any “insider”, which includes many business associates as well as relatives within the third degree of kinship. Your uncle is related in the third degree. Your cousin is related in the fourth degree, so the lookback period for a debt to him would only be 90 days.
The bottom line is that fraudulent transfers will only cause you more problems with your creditors and the bankruptcy court. Despite the temptation to take care of family first, consult with an attorney before you begin transferring assets if you are contemplating bankruptcy.