Prior to filing for bankruptcy, you might think about the efficacy of transferring your car or house to a friend or family member. Also, you might wonder if you should pay back moneys owed to a friend or family member prior to filing.
It is quite understandable that you should want to preserve as much of your property as possible for your family. However, transferring property to family members prior to bankruptcy in an attempt to protect property from creditors is not effective. Bankruptcy trustees, the people in charge of gathering property to pay your creditors, have the power to void these types of transfers. Your family member will be required to turn over the property. Even if you do not intend to defraud your creditor, the trustee can void a transfer of property that is not made for equivalent value. So, for example, a mother cannot transfer her house to her son for only $1. This would be considered a fraudulent transfer and the trustee would void the transfer. The house will be property of the estate despite the mother’s efforts. The same would be true for other property, such as your vehicle.
Often a person who is facing bankruptcy has taken a loan from a friend or family member. Obviously, it is probably very important to you to pay them back in full, and while you might be worried that they won’t receive all of the money in bankruptcy, it is not a good idea to pay them prior to bankruptcy. Your bankruptcy trustee can void this repayment, as well, because it might be considered preferential treatment to that creditor over other creditors. This does not, however, mean that you can’t pay them back eventually. After the bankruptcy process is closed, you have the option of voluntarily paying additional moneys to any creditors, including friends or family.
Fortunately, there are also ways to protect your property within bankruptcy. Every state provides for exemptions that allow you to preserve a certain amount of various types of property. In the previous example, though the mother could not preserve her house by transferring it to her son, she can take a homestead exemption in the property. Here are a few examples of how exemptions work.
Homes: There is a $150,000 homestead exemption in Arizona. This means that if you have $150,000 or less in equity, you can keep your home. If you have more than this amount, the trustee can sell it, but you still will receive the $150,000.
Motor Vehicles: There is a $5,000 exemption. If you car is paid for and worth less than $5000, you can keep you car. If it is worth more than $5,000, then it might be sold. Still, you will be able to keep $5,000 as per this exemption.
Food, Fuel & Provisions for 6 months: 100% of this is allowed.
Check out the exemption laws for a more complete list of exemptions. To make sure that your property is protected from creditors, consult an attorney when planning for bankruptcy.
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