If you transfer assets out of your name to hide them from creditors or the trustee appointed to your case, you would be committing bankruptcy fraud. Depending on the circumstances of the transfer, the trustee may have grounds to:
To learn more about what you can and can’t do when planning for bankruptcy, see Prebankruptcy Planning.
You don’t lose everything you own when you file for bankruptcy. Each state decides the type and value of assets you’ll need to maintain a home and employment and lists it in the state’s exemption laws. If your property is exempt, you can keep it.
So what happens to nonexempt property—the property you can’t protect with an exemption? It depends on the bankruptcy chapter you file.
If you file for Chapter 7 bankruptcy, the bankruptcy trustee assigned to your case has the power to take nonexempt property that you can’t protect with an exemption, and sell it to pay back your creditors.
Regardless of the chapter you file, you might be tempted to give away, hide, or sell some of your property for less than what it’s worth before filing your case. But this is always a bad idea.
If you hide, give away, or destroy property with the intent to defraud your creditors within one year of your bankruptcy filing date, the court has grounds to deny your bankruptcy discharge—the order that erases qualifying debt. If the court denies your discharge, you will remain on the hook and responsible for paying back all debts that could have been wiped out in your bankruptcy. As a result, giving away your assets to hide them from your creditors is never a good idea.
In addition to risking your discharge, the bankruptcy trustee can typically reverse, or avoid, the recent property transfers and get the asset back for the benefit of your creditors. If you transfer property out of your name within two years prior to filing for bankruptcy (or within the time allowed by your state for setting aside a fraudulent transfer), the trustee can avoid (undo) the transfer if you:
This means that giving away your property before filing for bankruptcy will usually not keep it from your creditors. But keep in mind that if the asset had no equity or if it was exempt, the trustee will likely not seek to avoid the transfer.
For more information, see Bankruptcy Clawbacks of Preferential & Fraudulent Transfers.
If you give away your property with the intent to conceal it from your creditors or the bankruptcy trustee, you could be prosecuted criminally. Bankruptcy fraud is a federal offense that can result in hefty fines or land you in prison. If the bankruptcy trustee suspects fraud in your bankruptcy, he or she can refer your case for criminal investigation. The penalties include a fine of up to $250,000, twenty years in prison, or both.
Many debtors mistakenly believe that they will lose all of their property if they file for Chapter 7 bankruptcy. However, the majority of Chapter 7 bankruptcies are “no-asset” cases where debtors get to keep all of their property. The amount of property you can keep in Chapter 7 bankruptcy, or protect in Chapter 13 without paying for it, depends on the exemption laws of your state.
To learn more, see Bankruptcy Exemptions.