Should I deed my assets to my kids during bankruptcy?

We get this question all the time, and advise our clients that gifts or transfers of assets to friends or relatives during bankruptcy may be the worst thing they could do.  Both you and the recipient might lose the asset and you might lose your right to a bankruptcy discharge.

One purpose of the bankruptcy code is to provide honest debtors with a fresh start.  The law is interpreted liberally in favor of the debtor and strictly against the creditor.  The debtor should receive a discharge unless the debtor has been less than honest.

• 727(a)(2) provides that a debtor may be denied a discharge if four elements are proven:

1. The debtor’s property was transferred, removed, destroyed, or concealed.
2. The debtor engaged in such acts or permitted his authorized agent to do so.
3. The act was done within one year of the bankruptcy filing.
4. The debtor had actual intent to hinder, delay, or defraud a creditor or an officer of the bankruptcy estate.

Most often, the critical element is the intent to defraud.

Intent to defraud is usually established by circumstantial evidence

That intent must be actual.  Because it is unlikely that a debtor will admit intending to defraud creditors, intent is usually established by circumstantial evidence.

As the name implies, circumstantial evidence is derived from the circumstances.  It creates an inference.

Courts look to a number of factors in determining if actual fraud exists.  If a creditor demonstrates that one or more of these factors are present, the creditor will have established its prima facie case, satisfying its initial burden of proof.  The debtor must then demonstrate that despite the circumstantial evidence the debtor had no fraudulent intent.

Fraudulent transfer allegations are very serious, given that the asset transferred may be lost and that a bankruptcy discharge may be denied.  Detailed care and analysis should be undertaken before any transfer is made.  Whether you are a debtor or a creditor, be sure your attorney is well-versed in this area of the law and is experienced in dealing with fraudulent transfers.