Gifts in Bankruptcy - What's the Harm?

Gifts in Bankruptcy, either Chapter 7 or Chapter 13, can be problems that keep on giving.

Gifts in bankruptcy can be viewed by the Eastern District of Michigan Bankruptcy Court and Bankruptcy Trustees as simply that. Or they can be viewed as a fraudulent transfer that can be "voided" by a Chapter 7 bankruptcy trustee.

Gifts in Bankruptcy: Family-Members and Friends

A gift to a family-member, friend, or other personal acquaintance can be undone by a Chapter 7 Trustee in particular under 11 U.S.C. Section 548 regardless of whether the gift or transfer of a personal property or of cash was made with an intent to hinder, delay, or defraud creditors, which is the standard for the finding of a "fraudulent transfer" under Michigan State law . Sec. 548 of the Bankruptcy Code states that a transfer made within 2 years of the filing of a bankruptcy if the transfer was for "less than equivalent value" and while the filing person was legally "insolvent." Insolvency under Section 101(32)(A) of the Bankruptcy Code, simply put, is a "balance sheet" test which compares debts to assets at the time of the transfer. If the value of the debts outweigh the value of the assets owned by the person conducting the transfer, that person is legally insolvent. (Of course, it's not so simple as that: all of these steps have been heavily litigated in the Bankruptcy Courts and will continue to be litigated.) So, for example, if you title an automobile to your grandmother eight months before filing for bankruptcy and, at that time, you owed to creditors an amount of money greater than the value of everything you own (not including the value of the automobile in question), you are legally insolvent under the Bankruptcy Code. Because that transfer took place within two years of the filing of the Chapter 7, it is a "fraudulent transfer" under the definition of the Bankruptcy Code even if you didn't at all intend to defraud creditors, the Bankruptcy Court, or anyone else and had no idea at the time of the transfer that you would be filing for bankruptcy eight months later. In that example, such gifts in bankruptcy can be undone by the Chapter 7 Trustee. That is, the Trustee will sue your grandmother to get the car or the value of the car in order to liquidated it for the benefit of your creditors. It is extremely important, therefore, that you disclose all such gifts and transfers to your bankruptcy attorney prior to filing a Chapter 7 bankruptcy. If you must file bankruptcy immediately to stop a wage garnishment or collection lawsuit or foreclosure and such gifts or transferred have occurred, this can be a good reason to file a Chapter 13 bankruptcy. In Chapter 13 bankruptcy, assets are not liquidated, and Chapter 13 Trustees do not therefore pursue such "fraudulent transfers." With a Chapter 13, your grandmother will not be sued. (That said, if there was some fraudulent intent in the transfer, your ability to obtain a discharge can still be endangered. All the more reason to consult an experienced Michigan bankruptcy attorney such as The Hilla Law Firm, PLLC if you are considering filing for bankruptcy.)

Gifts in Bankruptcy: Charitable Giving

On the "good news" side of gifts in bankruptcy, there is an exception in place for certain charitable contributions. The Religious Liberty and Charitable Donation Protection Act of 1998 amended the Bankruptcy Code to protect contributions made to protected organizations. They must not have exceeded 15% of the debtor's gross income  the year they were made, and, if they were, must have been consistent with the debtor's history of such giving. The 15% limit applies to each individual transfer, also, not the entire year's worth of charitable contribution, even if it exceeds 15% in total (courts have ruled that no part is protected, however, if a total15% is exceeded without any past giving history).

The Bottom-Line

The bottom-line is that you should not transfer any property to a friend, family-member, or anyone else if there is any chance that you may file for bankruptcy in the next several years without first seeking the advice of an experienced Michigan bankruptcy attorney. Michigan's fraudulent transfer statute looks back 6 years, and a bankruptcy filed in the State of Michigan will rely on that time-period to make determinations regarding fraudulent transfer. Anything transferred in the 90 days prior to filing for any reason is subject to cruel scrutiny by a Chapter 7 Trustee. But that does not mean that you should not seek counsel if you need relief from debt. You may have performed such a transfer unknowingly before realizing that you need the relief of the bankruptcy process. If such a situation has occurred and waiting to file your case is unavoidable due to garnishment, a lawsuit, foreclosure, or other issue that can be immediately halted by a bankruptcy filing, it may be that a Chapter 13 bankruptcy is the best course of action for you, rather than a Chapter 7. In a Chapter 13, no property is liquidated by the Trustee, so no transfer made will be avoided or undone by a Trustee, nor any friend or family-member sued or pursued by the Trustee. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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If you enjoyed reading "Gifts in Bankruptcy - What's the Harm?," please browse our other articles on our main Michigan Bankruptcy Blog.

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