My advice to all my clients: Don’t analyze problems; analyze solutions.

Can I give away everything prior to bankruptcy?

On Behalf of | Oct 21, 2022 | Bankruptcy

Many of our blogs focus on money. Our posts can be about debt, bankruptcy, estate planning, etc. And, in a recent blog post, we spoke about moving money into a trust to qualify for government benefits.

This naturally leads to a discussion of moving money prior to a bankruptcy, and whether potential filers should give everything away, max out their credit cards, etc.

Can I give away everything prior to bankruptcy?

Technically, yes, but it is not recommended.

Prior to a bankruptcy, you can do whatever you want with your property. However, if the bankruptcy trustee believes that any of these transfers were fraudulent, then the trustee can roll back the transactions to sell the property.

The proceeds from those sales go to pay your creditors.

Mandatory transfer reporting

It may come as a surprise, but when you file for bankruptcy, in addition to listing all your assets, income and debts, you also must report any transfers.

Indeed, when you file for bankruptcy, part of the initial filing is reporting all property transfers in the two years before the Chapter 7 or 13 bankruptcy filing.

Property transfers include both sales and gifts, and this list must be exhaustive. Any time that something you own is moved to a new owner, then, it qualifies as a transfer under the Bankruptcy Code.

Types of transactions that do not count

Long-term borrowing does not count. For example, if you lend your car to a friend for an extended period, but you do not transfer title, a transfer has not occurred.

Within reason, normal or annual events that traditionally include a gift will not count, like birthday, holiday and special occasion gifts. Reasonable donations also do not qualify as transfers, including items, money and tithing (donations to religious organizations). Religious donations are usually limited to 15% of your gross annual income.

This is a fact-specific analysis. For example, transferring the family home as a birthday gift would not qualify. However, that same transfer may be reasonable as a wedding gift to a child with a baby on the way that could not otherwise afford a home. Similarly, gifting a car may be reasonable as a graduation gift, but not randomly as a housewarming gift.

The amount of time that the bankruptcy trustee examines is the look-back period. While many transactions have a look-back period of only two years, other types of transactions can go back a decade.