There are a lot of misconceptions about bankruptcy. One of the biggest ones is that the Court will sell everything you own in order to pay your debts. This misconception leads some people to not consider filing for bankruptcy when they should, and it leads others to go to extremes to get rid of property before filing.
Here is a common example that I have run into many times with my clients. Margaret doesn’t own anything except a 2005 Buick LeSabre. Her car is paid for and is worth about $5,000.00. She approaches her son, Mark, and tells him that she has $17,000.00 in credit card debt and is thinking about filing for bankruptcy. Mark tells her that she should transfer her car into his name before filing for bankruptcy to make sure it stays safe and cannot be taken from her. Based on Mark’s recommendation, Margaret transfers her car to her son for $1.00.
A couple of weeks later, Margaret meets with me for an initial consultation. As I do at every consultation, I ask Margaret if she owns any cars and if she’s given away any property lately. She tells me the story about how she transferred her 2005 Buick to her son for $1.00.
Margaret has created a lot of unnecessary trouble for herself if she decides to file for bankruptcy. The bankruptcy laws would have allowed Margaret to keep her car if it was still in her name. Most people don’t realize that the bankruptcy laws are very generous in terms of the property you are allowed to keep while still getting help with your debts.
However, by giving away ownership of her car, Margaret has unknowingly participated in a fraudulent transfer. A fraudulent transfer happens when you give something, like a house, car or even money, away to someone else at a time that you know that you cannot repay your debts. The courts feel that if you wanted to get rid of something you should have sold it to someone and used the money you received to repay some of your debt instead of just giving it away. If you have fraudulently transferred something in the four years prior to filing for bankruptcy, the court can reverse the transfer, sell the property and use the money to repay your creditors.
Luckily for Margaret, Mark was willing to transfer the car back into her name in order to allow her to file a bankruptcy without having to lose the car over the fraudulent transfer. Unfortunately, sometimes people aren’t so lucky and can’t have the property transferred back into their name, which means they must wait 4 years until they can file a bankruptcy. In the meantime, they will get harassed by their creditors and are at risk of getting sued.
Before acting on a bankruptcy myth, give Steidl & Steinberg a call at 800-360-9392. We will tell you the truth about bankruptcy and advise you of the safe way to protect your hard-earned property. Don’t make a mistake that you could regret before visiting us for a free consultation.