Bankruptcy is the best legal recourse available to people who are struggling with financial debts which they are simply unable to pay off. Though it is essentially designed to provide respite to people, there are rules attached to it. One of them is about the transfer of property prior to a bankruptcy filing. Many people transfer assets (jewelry, shares, property, etc.) to family and friends in order to avoid them becoming a part of the bankruptcy estate. However, the court doesn’t look too kindly on such transfers. Moreover, inform bankruptcy lawyers of Los Angeles based firm Recovery Law Group mixing of bankruptcy and civil lawsuits can be quite horrible as seen in the case of Catherine, a California resident who was handling two lawsuits and two bankruptcies.
Catherine did not get along with her neighbors and often there was discord among them due to her behavior. She used to play loud music in the middle of the night which disturbed her neighbors; took her dogs to defecate in front of neighbors’ front lawns, and even released her vicious dogs into her yard to scare small kids and grandchildren of her neighbors. She even posted signs making outrageous claims defaming her neighbors. The signs accused neighbors of criminal and civil misdeeds and tanked their reputation, resulting in a loss of business for them. All of this behavior resulted in the neighbors’ filing a defamation lawsuit against Catherine.
While the defamation lawsuit was still pending, Catherine transferred the deed of her house to her daughter, with simply a “life estate” in the house. A life estate means that a person can reside in the property until they die. Catherine’s daughter agreed to return the deed on request, thereby becoming the legal owner of the house. After one year of this transfer of property, Catherine filed for Chapter 13 bankruptcy. The automatic stay benefit resulted in seizing of all collection actions including putting a stop to the defamation lawsuit of the neighbors since they were asking for monetary damages. With the dismissal of her bankruptcy after a couple of months, the automatic stay benefit was also lifted.
The neighbors filed again to set aside the transfer of her house as dishonest. Since they had filed a defamation lawsuit expecting to win, the move by Catherine to transfer her house was probably an attempt to make her “judgment proof.” In case a person is judgment proof, the plaintiffs, even after winning their case won’t be able to collect any compensation. Catherine lost the defamation suit and was expected to pay $320,000 to the neighbors, but she appealed against the verdict. One year after filing the appeal (and waiting for an update on the same), she filed for a Chapter 7 bankruptcy. By then, the judgment for $320,000 was affirmed.
After two months the court ruled that the transfer of Catherine’s house to her daughter was void. With this ruling, she became the legal owner of the house and that the property could be sold off to pay her dues to the neighbors. Catherine again filed for an appeal against the verdict, but unfortunately passed away before it could be decided. Her death resulted in the transfer of the ownership to her daughter as per the terms of transfer. This resulted in her estate having no money to pay off the neighbors’ debts. In case the transfer was deemed void, the property will be handed over to Catherine’s bankruptcy trustee who would then sell it off to pay the debts.
Catherine had transferred the house to her daughter’s name in order to protect it. However, since the transfer was considered fraud, it was voided. Thus the legal claim of the house remained with Catherine (and eventually her bankruptcy trustee). The law restricts people from transferring property to family and friends prior to bankruptcy filing since this is an attempt to prevent the sale of the said property during Chapter 7 bankruptcy. With the court holding on to the appeal, the transfer was declared void and after 20 long years’ Catherine’s neighbors received the compensation.
Often courts are able to see through the elaborate schemes people concoct to trick their creditors. Bankruptcy trustees are required to see through all paperwork to ensure that no asset goes unaccounted for. Any transfer of property to family and friends within a specified time frame, without proper compensation, is generally considered fraud. Such activity may result in dismissal of your bankruptcy case too. If you are going through a tough financial phase, feel free to call at 888-297-6023 to discuss your case with bankruptcy lawyers.