When you are struggling to get your finances in order, you may choose to sell assets that you don’t need, with the hope that you can make enough money to resolve your problems. You may be tempted to “gift” items of value. If you find that you still need to seek bankruptcy protection, you may face questions from the bankruptcy court or trustee about the disposition of those assets. We tell our clients that “bankruptcy is a fishbowl…it is safest to be able to be transparent”. You must always take care to avoid the appearance that your actions involved a fraudulent transfer.
Taking the Right Steps to Avoid Potential Problems
The most important thing to do is make certain that any sale is clearly what would be considered an “arm’s-length transaction.” This essentially means that the terms of the transaction do not reflect that the parties have common interests or that any favoritism was involved because of the relationship of the parties. The classic example of a fraudulent transfer is the sale or gift of extremely valuable property to a family member or friend for far less than its market value. One of the best ways to show this is to get a fair-market appraisal or some other reliable evidence of value of the goods sold. For cars, sites like www.kbb.com are good. For other property besides real estate, EBay or Craigslist may provide evidence of possible market value.
You need to be careful as well with gifts to charitable organizations, from a church to a soup kitchen or other nonprofit. You may be required to show that the organization is bona fide and that you make similar donations on a regular basis. You may also be required to show that you will not be a primary beneficiary of the donation. For example, it may be considered a fraudulent transfer if you donate a piano to your church when you are the church pianist.
Regardless of how you distribute property before a bankruptcy, it is critical that you keep accurate records. Ideally, your records should show what you sold or gave away, who the recipient was, the goods’ fair market value and whether there were other potential buyers.
If you are in such a situation, you should not delay in getting early qualified legal advice, in case a bankruptcy or similar action becomes necessary.
We provide a free initial consultation to every client. We do, however, reserve the right to charge a fee to review any work done by another attorney. For an appointment, call our office at (856) 596-2828 or send us an e-mail. Evening and weekend appointments are available upon request.