Transfers of Real Estate and Bankruptcy
Last night I had a consultation with a prospective client who in the previous year had lost his good-paying job and had been forced to take part-time work at much lesser pay to make ends meet. Because of his decrease in income, he’d resorted to overspending on his credit cards and now has $60k of unsecured debt that he can not repay.
Unfortunately, I wasn’t able to help this individual because of actions he had recently taken before coming into my office.
In January, 2007, my prospective client quitclaimed the fee simple interest he possessed in his homestead to his longtime live-in girlfriend via a quitclaim deed. At the time of the transfer, the house was worth $300k and the balance on the only mortgage was $140k. He was quite frank with me that the reason he transferred the property out of his name was because he was planning on filing a Chapter 7 bankruptcy in the near future, and did not want to lose his house to the bankruptcy court and his creditors.
It then became my unenviable job of telling him that what he’d done would not prevent the court from seizing the house as an asset in a Chapter 7 liquidation bankruptcy. The issues here are one of equity and one of transfer. In Illinois where I practice, an individual can protect up to $15k of equity in their homestead. (PLEASE NOTE: The homestead exemption varies state-to-state .) Even after a cost of sale analysis to account for broker fees, etc., my prospective client had over $130k of equity in his house. After deducting the $15k homestead exemption, this would leave roughly $115k of exposed equity in the house were he to file a Chapter 7 bankruptcy. In this case, a bankruptcy trustee would seize and liquidate the house and use the monies to repay this person’s creditors. Any surplus of sale would be returned to the client after all qualifying debts had been paid.
The fact that he’d transferred the house before the filing of bankruptcy will not stop the court from pursuing the equity in this situation. All transfers of assets within a two-year window prior to filing must be disclosed on a Chapter 7 or Chapter 13 bankruptcy petition in the Statement of Financial Affairs. A bankruptcy trustee by statute possesses the power to offset any transfers within a four-year window prior to filing if he deems the transfer to be fraudulent and if there’s a sufficient asset to make a meaningful distribution to the filer’s creditor’s.
In this case, had I filed a Chapter 7 Bankruptcy for this person, his assigned bankruptcy trustee would have “set aside” the fraudulent transfer and sold the property out from under the client so he could repay the $60k of credit card debt the client had incurred with the proceeds of sale from the house.
To make matters worse for this person, I also unfortunately could not put him into a Chapter 13 repayment plan because he no longer possessed the requisite household income to repay his debts and maintain his necessities, i.e. mortgage payment, food, clothing, transportation, utilities, etc.
Thus, I had to break the bad news that the only options he has now are either to sell his house and use the money he receives from the sale to repay his debt; somehow legitimately increase his income so he can support a Chapter 13 repayment plan; or wait the four year period until February, 2011 to file a Chapter 7 Bankruptcy so a trustee can not set aside the transfer at issue.
The lesson to be learned here is simple. If you are contemplating materially changing any aspect of your financial situation before filing bankruptcy, make sure to consult with an experienced attorney who can advise you if your intended actions would be potentially damaging to your future case.