Earlier, I posted about preferences in bankruptcy. Fraudulent transfers are similar, but not identical. Both preferences and fraudulent transfers (usually) involve paying someone within a set period before filing bankruptcy. But preferences occur when the debtor owed the payee something. For example, paying Mom back the $2000 she lent you last year. Fraudulent transfers occur when the debtor doesn’t owe anything to the payee. More like a gift, when the payor doesn’t receive reasonably equivalent value in exchange.
While preferences are discussed in §547 of the Bankruptcy Code, fraudulent transfers are discussed in §548. The trustee can undo preferences and fraudulent transfers (“avoid” in legalese) for the benefit of the bankruptcy estate. Section 548 is fairly long, but it spells out what conditions need to be met in order for the trustee to avoid a transfer. The Bankruptcy Code says fraudulent transfers must be within two years of filing the bankruptcy. But state law is also considered, and the Wisconsin fraudulent transfer statute is four years.
Why Should I Care?
If you decided to give your sister $5000 two weeks before filing bankruptcy because she needed to pay some bills, that transfer could be avoided by the trustee, who could get the money back from your sister and use it to pay your creditors. How does the trustee get the money back? Usually by suing your sister in an adversary proceeding. If the transfer wasn’t made with actual intent to defraud your creditors, your sister could give the money back to you before filing the bankruptcy. Assuming you have exemptions available to protect that money, you could re-gift her the money after filing. There are ways to protect your sister in these cases, but you need to speak with your attorney about it. Bankruptcy demands complete and honest disclosure, and trying to game the system usually ends poorly. As long as you’re completely upfront with your attorney, the issue can probably be resolved without anyone getting sued.
If you don’t care about your sister in this scenario, think about your discharge. There are a lot of exceptions to discharge, and many of them involve people not being honest. If the Court finds that you transferred property with the intent to defraud your creditors (a/k/a giving someone money to keep someone else from taking it), your bankruptcy case will be closed without you getting a discharge. Most people consider the discharge the main purpose for filing bankruptcy in the first place.
Trying to move around your finances on your own before filing bankruptcy is dangerous. Not only can you put your family members of getting sued for accepting a preference or a fraudulent transfer, you may lose out on your discharge. Talk to your attorney before moving money around or trying to beat the system. Bankruptcy is for the “honest but unfortunate debtor,” which I believe includes all of the clients I end up representing.