If you file for Chapter 7 bankruptcy, the appointed bankruptcy trustee has the power to take your nonexempt assets and sell them to pay back your creditors. Because of this, you may be tempted to give away some of your property prior to filing your case. But this is generally a very bad idea.
If you transfer assets out of your name to hide them from creditors or the trustee, 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 our Prebankruptcy Planning topic area.
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. 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 avoid 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 prior to 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 may be criminally prosecuted. 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.
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 depends on the exemption laws of your state.
To learn more, see our Bankruptcy Exemptions topic area.
If you can’t exempt all of your property, consider filing for Chapter 13 bankruptcy instead of Chapter 7. In Chapter 13 bankruptcy, you get to keep all of your nonexempt assets in exchange for paying off a portion of your debts through a repayment plan. The amount you must pay back depends on numerous factors such as your income, expenses, and types of debt. However, you must pay your unsecured creditors at least an amount equal to the nonexempt portion of your property because they would have been entitled to as much if you had filed for Chapter 7 and the trustee liquidated those assets.
To learn more, see our Chapter 13 Bankruptcy topic area.