Preventing Avoidance of Fraudulent Transfers through Chapter 13

 Posted on May 03, 2017 in Chapter 13

Overall, Chapter 13 can be more powerful and more flexible than Chapter 7. That often also applies to a fraudulent transfer.

The Problem

Our last four blog posts have been about so-called fraudulent transfers. Today we look at a way to possibly avoid the hassles caused by a fraudulent transfer.

A fraudulent transfer is a sale or gift of an asset you made during the two years before filing bankruptcy case, a sale or gift that can be undone (“avoided”) during your case. (See our post of Monday of last week introducing fraudulent transfers.)

Consider this example. A year before filing bankruptcy you gave a friend a second car you didn’t need and she desperately did. Now a year later, there is a good chance that your bankruptcy trustee could make her surrender that car. Under certain conditions the trustee would take it, sell it, and pay the proceeds to your creditors.

Your direct intention when you gave her the car a year ago could have been to keep that car from your creditors. Or you could have given her the car with no such intent, but instead only wanting to help your friend. However, even without any intent to hinder your creditors, the gift could be a trustee-avoidable fraudulent transfer.

Depending on your relationship to the person to whom you gave the car, you may not care what happens. But let’s assume you do care—a lot. She REALLY needs that car. You very much do not want a bankruptcy trustee to take it from her. You need to file bankruptcy to fix your financial situation, but you don’t want to risk her losing the car. You’re willing to do whatever is reasonable to resolve this problem.

Chapter 13 in General

One possible solution is to file a Chapter 13 “adjustment of debts” instead of a Chapter 7 “straight bankruptcy.” This is not the place to compare these two very different options in detail. Do that with your bankruptcy lawyer, if you haven’t already. If you’ve seen a lawyer and didn’t hear much about Chapter 13, it may be worth asking him or her specifically about it.

In general, Chapter 13 involves a payment plan spanning a period of three to five years. Before you decide that’s not right for you, be aware that it’s often much better than you’d expect. Chapter 13 provides significant advantages with many kinds of debts and certain asset situations. It is also usually better in solving the fraudulent transfer problem outlined above.

Paying to Protect Your Transferee

Chapter 13 is better with fraudulent transfers because it gives you more leverage and more flexibility.

Let’s use the example outlined above about the car you gave to a friend a year before you filed bankruptcy. Assume the car is worth $5,000. Assume also that if you filed a Chapter 7 case you giving away that car would qualify as a fraudulent transfer. The bankruptcy trustee would be able to take that car from your friend, sell it, and distribute the proceeds among your creditors.

How would that be different in a Chapter 13 case? Assume that under your budget you could afford to pay $225 per month to all of your creditors. Assume also that based on your income you would be required to pay into your plan for three years. So normally you’d pay $225 per month for three years.

But you really want to protect your friend and enable her to keep the car. Most Chapter 13 trustees would likely allow her to keep the car if you paid extra into your payment plan to make up for the money that selling the car would have gotten to your creditors. In our example you could continue paying the $225 per month beyond the required three years until you paid an additional $5,000. That would take about 22 extra months. (We’re simplifying the calculations a bit by skipping some complicating details like trustee fees.)

The end result is that the trustee gets that extra $5,000 through payments from you instead of by selling your friend’s car.

Caution

The Bankruptcy Code that governs Chapter 13 cases is the same federal codified law all over the country. But bankruptcy judges and appeals courts, and even individual trustees, interpret these statutes differently. So, in your part of the country you may not be able to use Chapter 13 as outlined here. On the other hand, in certain circumstances the results may be even better. So talk with your local bankruptcy lawyer to find out what’s available with your court and trustee.