Why You Need To Look Back To Stay In The Clear When Filing Bankruptcy

You owned a piece of property, but you sold it before filing for bankruptcy. What happens when your case gets filed?

When you transfer property out of your name to delay or defraud a creditor within a short period of time prior to filing for bankruptcy, that’s called a fraudulent transfer.

It’s also considered fraudulent under the U.S. Bankruptcy Code if you transfer property for less than fair market value in the run-up to your bankruptcy filing.

With so many people filing for bankruptcy in the wake of the foreclosure crisis, it shouldn’t be shocking to find out that allegations of fraud pop up fairly regularly.

Here are a few things you need to know.

The Look Back Period For a Fraudulent Transfer

Under the U.S. Bankruptcy Code, the bankruptcy trustee can look at all transfers of money, property or assets made within the two years immediately prior to your bankruptcy filing.

California, however, has adopted the Uniform Fraudulent Transfer Act (UFTA). Under the UFTA, creditors can look at all transfers made within four years of filing for bankruptcy in California to find a fraudulent conveyance. This is in spite of the federal 2-year look-back period.

This isn’t the case elsewhere. In New York, for example, the look back period is six full years.

What Actions Your Bankruptcy Trustee Take

First, the bankruptcy trustee will look at all transfers made within the appropriate look-back period. This may include reviewing sales contracts, questioning you about the facts and circumstances surrounding the sale, and determining fair market value of the property at the time of sale.

Second, if the trustee finds something odd, he or she may decide to sue the purchaser of the property to take back the asset. This is called, “unwinding the sale,” and it allows the trustee to get the property back and then sell it for the benefit of your creditors.

How To Avoid A Fraudulent Transfer Problem

What I typically do is go through all of the potentially problematic transfers and determine how close we are to the end of the look-back period. If we’re close, I try to wait it out. Once the clock ticks down, there’s nothing that can be done to unwind the transfer.

If you can’t wait until the look-back period runs out, we may need to look at a Chapter 13 bankruptcy. When you file a Chapter 13 you get a lot more control over your assets and the way they’re disposed of. We’ll figure out the value of the transferred asset, pay out the value in a Chapter 13 Plan and you won’t need to worry about it anymore.

The issues are extremely complicated, but the solutions are easier if you’ve got someone on your side who understands not only the bankruptcy laws but also has the experience needed to help minimize problems.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.