Submit

QUESTION:  I NEED TO DECLARE BANKRUPTCY, BUT CAN I STILL KEEP MY HOME, OR BUSINESS, OR OTHER ASSET?  CAN I TRANSFER ASSETS TO MY RELATIVES?

These questions are perhaps some of the most common questions I receive in my law practice.  Most people in financial distress who have finally realized that bankruptcy may be inevitable, or even necessary, still wish to keep some or all of their biggest assets and contact me to try and find some “lawyerly” way of doing so.  The short answer is:  YOU CANNOT HAVE YOUR CAKE AND EAT IT TOO. 

Let’s take the example of one of our clients--let’s call him Mr. Smith to protect his privacy.  Like many of our clients, Mr. Smith owned a business for many years and given the current economic downturn, his business suffered tremendously to the point where he was losing money every month.  Mr. Smith also had a house (his primary residence), and investment property (a 4-unit home).  He had equity on both his home and his investment property, but had over $100,000 in credit card debt (all personal), and $300,000 in outstanding secured loans on his business.  He was barely able to pay his mortgages (with help from his relatives).  What had happened was—which is very common these days—Mr. Smith tapped into his credit cards for several months to sustain his business and other expenses, and when the credit crisis started, his credit cards were maxed out and was unable to obtain more credit or loans.  Thus, when Mr. Smith contacted me, he was completely out of money, and unable to pay his business or personal expenses.

Because Mr. Smith had equity on his home, and also his investment property, he did not want to lose his properties.  He had enough equity on his home that the Bankruptcy Trustee would likely SELL his home, give him his HOMESTEAD exemption ($50,000 for single; $75,000 married), and distribute the remaining to creditors.  As for the investment property, it is likely that the Bankruptcy Trustee would also seek to sell the property and distribute ALL equity to creditors (there is no Homestead exemption on investment properties).  As such, Mr. Smith asked me whether he could simply transfer title of his home and his investment property to relatives before filing for bankruptcy.  That way--he thought--he could get his $300,000 business loan and $100,000 credit card debts discharged in Bankruptcy, while still keeping his home and his investment property.

Here is the general rule in bankruptcy – ANY Transfer within 90 days prior to filing of bankruptcy, may be presumed to be fraudulent, and can be UNDONE by the Bankruptcy Court.  These types of pre-petition transfers are called preferential transfers, and they are scrutinized by the Courts.  As such, if Mr. Smith transfers his home and his investment property to a relative within this 90 day period prior to filing bankruptcy, the Bankruptcy Court can undo these transfer and bring the home and investment property back into the bankruptcy proceedings and make them part of the Bankruptcy Estate.  Mr. Smith then asked what if he transferred these assets now, waited over 90 days, and then filed for bankruptcy?  That is a good question, but the answer is simple:  With these types of transfers, if the Bankruptcy Trustee suspects that Mr. Smith made these transfers with the intention to hide these assets and avoid these properties from becoming part of the Bankruptcy estate, then the Trustee and the Bankruptcy Court can go back further (past 90 days prior) and investigate the transfers made.  There is no specific time line how far back the Court will go, but if FRAUD is suspected, the Trustee may go back well beyond the 90-day period.  Furthermore—and more important—Mr. Smith could be charged with fraud, which then creates a whole new set of legal problems.  As such, I advised Mr. Smith NOT to transfer any assets prior to declaring bankruptcy if such transfers were being made to avoid the properties from being brought into the bankruptcy proceedings.

In conclusion, Mr. Smith will likely lose his house and his investment property if he declares Chapter 7 bankruptcy (Liquidation).  However, if he declares Chapter 13, he could propose a REPAYMENT PLAN whereby he can seek to keep his home, and pay—at least partly—the rest of his creditors over a 3 or 5 year period (depending on his income).  The problem is, Mr. Smith’s income was pretty much non-existent (only a couple thousand dollars per month), and thus proposing a Chapter 13 plan would probably not be confirmed by the Court.  As such, Chapter 7 seemed to be the only option for Mr. Smith.

But please remember:  Mr. Smith, while losing his home and his investment property in bankruptcy, he will have a NEW FRESH START, where he can at least be freed from his business loan and credit card debt, and proceed with his life.  Bankruptcy laws were made exactly for that purpose, but Debtors have to remember that you CANNOT try and defraud the courts and try to outsmart the Bankruptcy Court.

Please remember that each case is unique and you should contact our office if you have specific questions that apply to you.

Thomas Suh

HOPE LAW GROUP (213) 670-0068