If you are thinking of bankruptcy or struggling with financial insolvency, you may think desperate times call for desperate measures. And, one of those measures may be to moving assets into a trust while you declare bankruptcy. This would be a bad idea for a number of reasons.
Transferring to a trust likely not an option
The bankruptcy trustee’s job is to make sure all non-exempt property is liquidated, including items you transferred prior to the bankruptcy. This includes rolling back those transactions, if needed. This means that you cannot hide assets in a trust.
When you file your bankruptcy petition, part of the filing process is reporting all property transfers within the prior 2 years before filing. The bankruptcy trustee looks through these filings to determine whether the transfers were fraudulent. If so, they can undo those transfers, take the property back and liquidate the property to pay creditors.
In your bankruptcy case, the look-back period could be longer. For example, self-settled trust transfers have a look-back period of 10 years. And, depending on the state where you file, you could have a longer look-back period.
The right to transfer property
You have the right to transfer property your property. This means that you can sell it, donate it or give it away whenever you like. This includes before the bankruptcy filing. However, once you file for bankruptcy those transactions could be deemed fraudulent under the Bankruptcy Code.
What does not qualify as fraudulent?
Reasonable gifts that are given for traditional reasons, like special occasions, birthdays and holidays usually do not qualify as fraudulent transactions. Donating cash or tithing also would not qualify, as long as they are less than 15% of your gross annual income.
Like most New Jersey Chapter 7 bankruptcy filers, most of what you own and have would be exempt from liquidation. There are exemptions in other types of bankruptcy filings as well, and if the transferred item would have been exempt, then it cannot be fraudulent.