One question bankruptcy clients are asked at their 341 meetings is, “have you transferred anything to a third party in the last two years?” I prepare my clients for this question, but I have seen other debtors stumble when asked. Sometimes, it’s because they don’t understand what exactly a “transfer” is.
Many people don’t realize that the definition of a transfer is quite broad. The term is defined in the Bankruptcy Code under 11 U.S.C. §101(54). It includes, “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of . . . parting with property or an interest in property.” This means that “putting the guns in my dad’s name” is a transfer. So is “selling” the cabin up north to your buddy for $10 to keep it out of the reach of your creditors.
Certain transfers can be “avoided” by the bankruptcy trustee under §547 and §548 of the Bankruptcy Code, meaning that the trustee may undo the transfer and reclaim the property for the benefit of your creditors. This is why bankruptcy attorneys will tell you NOT to pay back that loan to Grandma shortly before filing bankruptcy. Depending on the specific facts of the situation, the trustee might avoid the transfer, recover the money from Grandma, and use it to pay your other creditors. In most cases, the transferred property could have been retained and exempted had the transfer not been made. (You can pay Grandma back after filing your bankruptcy. Just don’t pay her before filing.)
If you are having financial problems, be sure to talk to a qualified bankruptcy attorney before selling, trading, or giving away anything. If you later decide to file bankruptcy, the transfer you didn’t make might turn out to be your wisest decision.