Sale of Exempt Asset to Insider Before Ch 7

[Rover]

Would a sale of an exempt asset to an insider within, say, a year prior to filing Ch 7 somehow constitute a fraudulent transfer? Why would a trustee care if the asset were exempt anyway?

For example, in Florida a home is exempt in BK. If one sold the home to a relative for a below market price that covered the mortgages two months before filing Ch 7, on what grounds could a trustee object? The trustee couldn't have received anything from the home anyway.

[StartingOver08]

Why would you transfer an exempt asset prior to filing? It does nothing but raise questions

[Rover]

Why would you transfer an exempt asset prior to filing? It does nothing but raise questions

Well, that's the issue I"m asking about. If it's exempt, why would it raise questions?

[StartingOver08]

Well, the lookback period is 10 yrs on real estate transfers.

In Fl the exemptions are extremely small except for the homestead exemption.
If you have equity over and above the mortgage the Trustee wants it - except they can't get to it if you are the filer and use the property as your homestead.

However, when you transfer the asset to an insider for below market value prior to the filing, it brings into question whether the Trustee thinks its a fraudulent conveyance. You might find yourself proving to the Trustee that it is not a fraudulent conveyance, and it might take an AP to do so. (I don't know, I'm not an attorney)

I know in my BK (and I'm in S Fl) the Trustee looked back at the full 10 yrs of RE transactions for me (where I was a principal).

There is a good article here about doing these types of transfers (that might support your position):

When are you Safe after a Fraudulent Conveyance?
By Nicholas Ortiz, Boston Bankruptcy Attorney on Jan 25, 2009 in General Bankruptcy Information, Massachusetts

Very generally, a fraudulent conveyance is a transfer of money or property from a debtor to someone or something else when either (1) the debtor intends to defraud creditors or (2) the debtor received less than a reasonably equivalent value in exchange for the transfer and made it while insolvent. So, for example, the proverbial: “I transfered my house out of my name so my creditors wouldn’t get it” is a fraudulent conveyance. These transfers can create quite a few problems in bankruptcy.

A strict answer to the title question is one year. That is because conveyances that are actually fraudulent disqualify the debtor from receiving a discharge if made within one year of the filing of a bankruptcy. However, the period of time in which the property can be recovered by the trustee is longer.

The limitations period for avoidance of fraudulent conveyances has changed over the years, but currently it is two years under the Bankruptcy Code (Section 548) and whatever longer period is available under state law (Section 544). The latter will clearly vary, but since I practice in Massachusetts, I will use its laws as an example. Massachusetts adopted the Uniform Fraudulent Transfer Act (UFTA) in 1996 and, in the process, created a four-year statute of limitations for avoidance of fraudulent conveyances. This blessedly simplified the patchwork of limitations periods that existed in the case law previously. However, the complexity hasn’t completed been scratched. When the trustee can allege that a hidden agreement exists between the debtor and the recipient of property–such as when a family member takes title to real estate with the understanding the debtor still really owns it–the trustee can argue that a resulting trust for the benefit of the debtor has been created. When there is such an agreement at the time a bankruptcy is filed, there really is no statute of limitations because the trustee is simply succeeding to the beneficial interest of the debtor in the real estate or other property. See, e.g., In re Simpson, 334 B.R. 298 (Bkrtcy.D.Mass. 2005).

It also warrants mention that the 2005 BAPCPA amendments created a special 10 year look-back period for fraudulent transfers to self-settled trusts of which the debtor is the beneficiary.

Fraudulent conveyances should be avoided. Contact an experienced bankruptcy attorney before transferring any property outside the usual course of conducting yourself if you are insolvent or can no longer pay your debts as they come due.

See the link: http://www.************************/...nt-conveyance/

[keepmine]

Do yourself and your family a huge favor and keep them out of your financial difficulties.

[Rover]

Well, it seems to me that the trustee would only be interested in fraudulent transfers. A fraudulent transfer would be one which attempted to hide assets from creditors that would belong to the creditors in bankruptcy.

An exempt asset does not belong to the creditors in bankruptcy. Therefore, transfer of an exempt asset could not be a fraudulent transfer.

Granted, the transfer of the exempt asset would be listed on Form B7, but it could not be found to be fraudulent because no creditor is being hurt by the transfer.

[lrprn]

An exempt asset does not belong to the creditors in bankruptcy. Therefore, transfer of an exempt asset could not be a fraudulent transfer.

You still haven't explained why you want to transfer an asset that would be protected anyway.

Frankly, you won't have a legal leg to stand on here if you challenge the insider asset transfer in court. The bk law is very clear that the transfer of assets to an insider before filing bankruptcy with the intent to hide it from the court is fraud. There's no stipulation that it's only fraud if the asset was non-exempt.

So.....we're back to my original question.....what do you gain if you transfer your house to an insider family member if you could protect it with your exemptions when you file?

[2Bshinyandnew]

Well, it seems to me that the trustee would only be interested in fraudulent transfers. A fraudulent transfer would be one which attempted to hide assets from creditors that would belong to the creditors in bankruptcy.

An exempt asset does not belong to the creditors in bankruptcy. Therefore, transfer of an exempt asset could not be a fraudulent transfer.

Granted, the transfer of the exempt asset would be listed on Form B7, but it could not be found to be fraudulent because no creditor is being hurt by the transfer.

The trustee is interested in ALL transfers. That is his/her job, but most importantly, that is how they get paid. The whole point of a homestead exemption is to protect the debtors home. Period. Once title passes on to another individual the property loses its exempt status, regardless of intent.

By transferring title of the home to another, the home no longer legally belongs to the debtor. The equity that would have been exempt if the transfer had not happened is now available for another person to use that does not benefit the debtors creditors This most likely will be seen as constructive fraud, which is still fraud. At the very least, the trustee will seek to undo the transaction to recover the assets which now no longer have exempt status, and the trustee has a right to recover under the BK Code. At worst you can have your entire case dismissed.

I cannot figure out any benefit to doing such a thing and I'm 99.999% sure you could not argue your way around it with the trustee. The BK laws were created just to prevent such actions. Keep the house as is, and sign it over after your bankruptcy is complete, discharged and closed.

[2Bshinyandnew]

Maybe I was wrong? I found the following blog entry below. I underlined the relevant paragraph. I could be reading this incorrectly, or maybe there is a typo?

http://floridaassetprotection.blogs.com/alperlaw/2008/04/reasonably-equi.html

Reasonably Equivalent Value Required To Avoid Fraudulent TransferIf a debtor transfers an asset which is exempt from creditors the creditor can transfer the asset for any amount of money, even for no money, without fear of attack under fraudulent conveyance statutes. There is no such thing as a fraudulent transfer of an exempt asset.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

[HHM]

You can do it. If the property is exempt anyway, then you can transfer, but the real question which has already been posed is "Why Do It?"

[2Bshinyandnew]

You can do it. If the property is exempt anyway, then you can transfer, but the real question which has already been posed is "Why Do It?"

Agreed.

I will be much more careful about posting that I am 99.99% sure about anything though Lesson learned.