The rational for allowing people to file bankruptcy is that sometimes one’s debts grow so large that it becomes impossible to ever repay what he owes, and when an individual files a Chapter 7 Bankruptcy he expects to receive a discharge of most of his debts. In most cases in a Chapter 7 Bankruptcy no payment is made toward the debt; however, in some situations an individual owns property that is more valuable than the exemptions allowed by the bankruptcy law.
When that happens the bankruptcy trustee will sell the property, pay the debtor the amount of the exemption, and use the balance to make partial payments to the creditors.
Under Illinois law for example an individual is entitled to a $2,400.00 exemption for a car, and a $4,000.00 general personal property exemption, sometimes called the wild card exemption. Thus if an Illinois resident who files a Chapter 7 Bankruptcy owns a $10,000.00 car and listed stock worth $12,000.00 the bankruptcy trustee will sell this property to pay the creditors.
People in this situation sometimes ask their bankruptcy attorney, if they can give away the property to a friend or relative before they file and thus protect it from the trustee.
The answer is no!
The law provides that, if an individual gives away property, while they are unable to pay their debts, it is considered a fraudulent transfer, and the bankruptcy trustee can recover the property from the new owner. The same rule would apply, if the debtor sold the property to a friend or relative for a nominal amount.
The fraudulent transfer rules rule can be applied for transfers made up to four years before the bankruptcy is filed, although they become less likely to come into play when a longer period has passed. This is because a key element of a fraudulent transfer is that the debtor had to be unable to pay his debts at the time that he gave away the property, and when the gift is made two or three years before the bankruptcy filing this is less likely to be the case.
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