Troublesome Transfers Disrupt Bankruptcy Planning

One of the more frustrating parts of bankruptcy practice occurs when I have to tell a prospective client that he cannot file because he recently transferred property out of his name in an attempt to protect that property from creditors.  Most of the time, the transfers are made by someone who owes money to a creditor that he cannot pay and he wants to protect assets from that creditors.Recently, for example I spoke to a man who has well over $100,000 of equity in his home and over $150,000 in credit card debt.  Recognizing the risk to his house, this gentleman executed a quit claim deed to his wife, transferring all of his interest in the house to her.  Five months after the transfer he called me to say that he was ready to file bankruptcy.  Unfortunately, I had to advise him not to file now because Section 727 of the Bankruptcy Code says that a transfer of property for no purpose other than to frustrate the intent of creditors within a year prior to filing is considered a fraudulent transfer and would prevent such a filer from receiving a discharge.Another type of troublesome transfer can arise when an elderly parent attempts to transfer assets to an adult child in an effort to qualify for Medicaid.   Usually the problem arises not for the transferor but for the transferee.A recent case out of Virginia highlights the problem. In the Woodworth case, an adult child convinced her elderly mother to invest the mother’s life savings in an account opened in the adult child’s name.  Both mother and daughter testified that the purpose of the transfer was to move assets from the mother’s name in an effort to qualify for Medicaid 1 in the future if the need ever arose.Both mother and daughter stated that both considered the funds to be the mother’s property, even if it was in an investment account owned by the daughter.When the adult daughter ran into financial difficulties and filed Chapter 7, the trustee asserted a claim on the investment account.   The judge agreed with the trustee that the daughter had complete ownership of the funds at the time they were transferred to the daughter and that her mother had retained no beneficial interest in them.   The bankruptcy law does not allow a debtor to voluntarily dismiss a bankruptcy so debtor Woodsworth and her elderly mother had to turn over the mother’s funds for distribution to creditors by the Chapter 7 trustee.The point here: it does not matter if your intentions were pure or if the property titled in your name really belongs to someone else.  It also does not matter that you were not thinking about filing bankruptcy when the transfer occurred.  Anytime you give or receive property of value for nothing in return, problems can arise in many areas of the law – bankruptcy, state fraudulent transfers, Medicaid eligibility.   So, before making one of these transfer, make a phone call to a lawyer for advice about consequences.

1. Transferring assets from a senior to an adult child is not per se illegal.  However, Congress has created a complex set of rules creating financial penalties for transfers made less than 5 years prior to the date the transferee becomes eligible for Medicaid.  An excellent summary about how Medicaid asset transfer rules are applied in Georgia can be found on the web site of the Hurley elder care law firm. ↩

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