Easy bankruptcy case, it appeared.
The potential client called. She and her husband were being sued for over $20,000.00 from a long-time creditor. She had once made payment arrangements, but when both she and her husband lost their jobs, the agreement fell through. They own their house, but the house was only worth about $70,000.00 and there was a mortgage of $35,000.00.
Since the Bankruptcy Code allows a married couple to exempt, or keep out of the bankruptcy, about $46,000.00 in household equity, and since their equity totaled much less than that, keeping the house was easy, as long as they made the payments. Their income was not high, less than $3,000.00 net per month, and they had little in the way of other assets. There was little equity in the newer car, and the older car was worth less than $4000, so they were able to keep both, again, as long as they made the payments on the car to which money was owed. The case looked fine.
Then the bombshell hit.
She said, I know it doesn’t mean anything, but we transferred the deed over to our son and daughter three years ago.
It does mean something.
Transferring property out of your name to another person (in this case for $1.00) to avoid paying your creditors leaves the Bankruptcy Court and sometimes the local court an opening to get that property back from the person or people to whom the property was transferred. It is often called a fraudulent conveyance.
When the Court does this, it can sell the property to get money to pay those same creditors you were trying to avoid. A Bankruptcy Court Trustee can use the laws of the Bankruptcy Code and the laws of the state where the case is filed to try to overturn the transfer that you so generously made to your kids.
The transfer laws of Pennsylvania look back four years to see when the transfer of property occurred, what your finances were like then, the value of the items transferred, and some other items to determine if this transfer should be overturned.
Are there times when it does make sense to transfer property in this way? I’m sure there are, but before you do something like this, call us at Steidl & Steinberg. There may be better, and smarter, options.