When you owe money to others, you are not free to give assets away. Or retitle them. Or put them in an irrevocable trust.
That’s the universal principle of Anglo-Saxon law that prohibits fraudulent transfers.
But the concept of a gift being wrong in the law is among the most difficult for ordinary folks to master.
It isn’t often that the local newspaper helps explain basic legal concepts.
But this story from my local paper illustrates the law of fraudulent transfers.
A local woman is being sued by San Mateo County for making a gift of her Menlo Park home to her sister.
The county wants to unwind the gift and to keep either woman from a further transfer of the house, because the woman owes the County at least $450,000 as a result of her embezzlement.
No giving assets away
It’s a cornerstone of our law that you can’t give your property away when you owe money to your creditors.
When you make a gift, your assets are diminished: you got nothing in return.
That’s fine if your gift doesn’t reduce your ability to pay what you owe.
But transfers that render you unable to pay your debts or transfers that were made for the purpose of putting assets beyond the reach of creditors are outlawed.
You have to suspect that the embezzler didn’t give her half million dollar Menlo Park house to her sister just out of the goodness of her heart. She wanted to put the house where the County couldn’t get it to recover its stolen money.
That’s a fraud on creditors. And creditors are entitled to sue to get the asset back.
Bankruptcy trustees can sue, too
Those on the brink of filing bankruptcy almost instinctively want to put their assets in the hands of friends or family so the asset isn’t lost to the bankruptcy trustee or the creditors.
They forget that the law doesn’t let you give your stuff away for the purpose of stiffing your creditors.
The trustee has the power to sue the recipient of a fraudulent transfer to recover the asset or its value.
And the trustee gets whatever rights creditors have under state law to recover fraudulent transfers, too. In California, the statute of limitations on such actions is four years.
So, give your asset away before bankruptcy, and you expose the recipient to a law suit. You also put your bankruptcy discharge at risk.
Sales are OK
Nothing keeps someone considering bankruptcy from selling assets before filing. The only limit is that the seller has to get roughly fair market value for the asset sold.
When the sale is fair, the seller gives up the asset and gets cash. The balance sheet stays the same; the asset mix is just different.
So even if you came by your debts honestly, in contrast to the embezzler in the paper, the age old prohibition on fraudulent transfers applies to you, in or out of bankruptcy.
Image courtesy of Tokyoship and Wikimedia.