There is a limit as to how much property is protected in bankruptcy, and debtors who own a significant amount of property are frequently tempted to transfer the property out of their name before the case is filed. Anticipating this temptation, bankruptcy laws give the Chapter 7 Trustee the power to retrieve the transferred property through what are known as fraudulent conveyance laws. To make matters worse, in most cases I have reviewed involving such transfers, the property would have been protected had it remained in the debtor’s possession.
What is a Fraudulent Conveyance?
Generally speaking, a Nebraska Chapter 7 Trustee may void transfers of property made within four years of bankruptcy if the property was transferred without receiving something of equal value in exchange.
Bankruptcy Code Sections 544 and 548 provide the rules involving fraudulent transfers, and to succeed in voiding a transfer the Trustee must prove that “(1) an interest of the debtor in property; (2) was voluntarily or involuntarily transferred; (3) within [four years] of filing bankruptcy; (4) where the debtor received less than reasonably equivalent value; and (5) debtor was insolvent at the time of the transfer or became insolvent as a result thereof. Schnittjer v. Houston (In re Houston), 385 B.R. 268, 272 (Bankr. N.D. Iowa 2008).
Two court rulings impacting Nebraska bankruptcy cases in this area were recently decided. On November 16, 2007, debtor Mary Joan Lumbar signed a Quitclaim Deed transferring her home to her parents, and then filed a Chapter 7 case on December 24, 2008. The Minnesota bankruptcy court ruled that even thought the home was transferred for less than fair value, the transfer was protected since had the debtor not transferred the home it would have been protected under the Minnesota homestead exemption. The Court essentially applied a “no harm, no foul” rule. However, the Eighth Circuit Bankruptcy Appellate Panel disagreed and stressed the fact that debtor loses the right to exempt property once it is transferred out of the debtor’s name. Sullivan v. Welsh (In re Lumbar), 457 B.R. 748 (2011). As a result, a home that would have been protected in the hands of the debtor became unprotected because of an ill-planned transfer.
The second case involved a Nebraska debtor who received a $5,201 tax refund and then paid $1,921.72 to their bank shortly before filing Chapter 7. In re Anders, 2011 Bankr. LEXIS 5049, Nebraska Case #11-40710 (2011). The Chapter 7 Trustee sought to avoid the payment to the bank, and the debtor objected claiming that the tax refund proceeds were exempt in the hands of the debtor and therefore the payment should not be voidable. Applying the Sullivan ruling, the Court stated that property ceases to be protected by exemption laws once they leave the debtor’s possession, thus the Trustee was able to recover the payment. Again, property that would have been protected was lost because it was transferred prior to bankruptcy.
Applying the new rules.
The obvious lesson to be learned in these cases is that a bankruptcy attorney should not only prepare a list of all property currently owned by a debtor, but a list of property that was transferred in the four (4) years prior to bankruptcy. Question #10 of the Statement of Financial affairs requires a debtor to list all transfers of property made within 2 years, but since the fraudulent conveyance law goes back 2 additional years, a careful attorney should question their client about transfers within the last 4 years. In addition, if any transfer was made to a Trust controlled by the debtor, the look back period is extended to ten (10) years.